COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2015 {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Slovenia, access to education, bank, corruption, economic consequence, economic disparity, economic growth, economic stabilisation, fight against unemployment, investment, loss, macroeconomics, poverty, structural adjustment













EUR-Lex - 52015SC0043 - EN











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52015SC0043

COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2015  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0043 final */









                                                                                                                                                   
Executive summary  1
1.       Scene
setter: economic situation and outlook  5
2.       Imbalances,
Risks, and Adjustment 14
2.1.   Interplay of
banking sector and corporate sector restructuring  15
2.2.   Efficiency
and costs of State Owned s and State Controlled Enterprises, and their impact
on investment and business environment 29
2.3.   Competitiveness,
investment and the role of FDI 45
3.       Other
structural issues 58
3.1.   Fiscal policy
and taxation  59
3.2.   Labour
market, education and social policies 65
3.3.   Business
environment and Research & Development 71
3.4.   Transportation,
energy and environment 77
3.5.   Public
administration and civil justice  79
AA.   Overview
Table  82
AB.   Standard
Tables 91
LIST OF Tables
1.1.     Key economic, financial and social indicators -
Slovenia   9
1.2.     MIP scoreboard indicators - Slovenia   10
2.1.1.  Overview of executed recapitalisation measures
and asset transfers to the BAMC   14
2.2.1.  The network of state ownership and state control
in Slovenia   26
2.2.2.  Relative importance of State-owned enterprises/State-controlled
enterprises (as % of total Non-financial companies) 27
2.2.3.  Total fiscal implications of State-owned enterprises/
State-controlled enterprises to the state and the economy  34
AB.1.  Macroeconomic indicators 82
AB.2.  Financial market indicators 83
AB.3.  Taxation indicators 84
AB.4.  Labour market indicators 85
AB.5.  Social indicators 86
AB.6.  Product market performance and policy indicators 87
AB.7.  Green Growth  88
LIST OF Graphs
1.1.     Real GDP growth and contributions 3
1.2.     Export market share  4
1.3.     Export performance  4
1.4.     Current account 4
1.5.     Drivers of the trade balance surplus, 2007-2014  4
1.6.     Net international investment position  5
1.7.     Private non-financial sector debt-to-equity
ratios in the EU (%) 6
1.8.     Deleveraging contribution dynamics, debt-to-GDP
change  6
1.9.     Non-financial companies - change in investment
2008-13, % of value added   7
1.10.   HICP and consumer confidence  7
2.1.1.  Household deposit of sector - total deposits by
type of bank  14
2.1.2.  Deposit rates (< 1 year) 16
2.1.3.  Deposit rates (> 1 year) 16
2.1.4.  Total assets and loans of the Slovenian banking
system   17
2.1.5.  Composition of banks' liabilities 17
2.1.6.  Net interest margin by bank  17
2.1.7.  Growth rate of interest income and expenses of
the banking sector 17
2.1.8.  Change in stock of domestic credit and
contributions 18
2.1.9.  Credit growth - Total loans 18
2.1.10.          Short term interest rates (< 1 year) 19
2.1.11.          Long term interest rates (>1 year) 19
2.1.12.          Indebtedness of the corporate sector 19
2.1.13.          Cash flow capacity and profitability of
the corporate sector 20
2.1.14.          Credit growth - corporate loans (incl.
SME) 20
2.1.15.          Credit growth - foreign loans 20
2.1.16.          New lending vs. prolongation  21
2.1.17.          NPLs by type of bank  21
2.1.18.          NPL ratios by type of bank  21
2.1.19.          Structure of NPLs by bank (Q3 2014) 22
2.1.20.          Coverage ratios type of bank  22
2.2.1.  Share of State-owned enterprises/State-controlled
enterprises in sectoral value added (as % of total sectoral valued added), 2013  26
2.2.2.  Employment, 2013 – public, private and State-owned
enterprises/State-controlled enterprises 27
2.2.3.  Book value of equity of State-owned enterprises/State-controlled
enterprises in Europe (as % of GDP) 27
2.2.4.  OECD indicators for product market regulation
(2013) 28
2.2.5.  Employment at State-owned enterprises/State-controlled
enterprises in Europe (as % of total employment) 29
2.2.6.  Leverage ratio of State-owned enterprises/State-controlled
enterprises and all Non-financial companies (excl. energy and public utilities
sectors) 29
2.2.7.  Profitability (ROCE) of State-owned enterprises/State-controlled
enterprises and foreign-owned companies relative to domestic private owned
companies (2004-2013 average) 30
2.2.8.  Profitability (ROE) of State-owned enterprises/State-controlled
enterprises and foreign-owned companies relative to domestic private owned
companies (2004-2013 average) 30
2.2.9.  Leverage ratio of State-owned enterprises/State-controlled
enterprises and foreign-owned companies relative to domestic private owned
companies (2013) 31
2.2.10.          Total factor productivity of State-owned
enterprises/ State-controlled enterprises and foreign-owned companies relative
to domestic private owned companies (in %), 2004-2013 average  31
2.2.11.          Profitability (ROE) of State-owned
enterprises/ State-controlled enterprises by sector in Slovenia and other CEE
countries (aggregate), 2013  32
2.2.12.          Costs per employee of State-owned
enterprises/ State-controlled enterprises and foreign-owned companies relative
to domestic private owned companies (2004-2013 average) 32
2.2.13.          Debt leverage ratio of State-owned
enterprises/State-controlled enterprises in Slovenia and other CEE countries
(2013) 33
2.2.14.          Labour productivity State-owned enterprises/
State-controlled enterprises and foreign-owned companies relative to domestic
private owned companies (in %), 2004-2013 average  33
2.2.15.          Total government deficit and deficit
increasing state interventions related to State-owned enterprises/State-controlled
enterprises 34
2.2.16.          Total government debt and debt
increasing state interventions related to State-owned enterprises/State-controlled
enterprises 35
2.2.17.          Subsidies to all Non-financial companies
relative to operating profit (EBITDA) and share of subsidies to State-owned
enterprises/ State-controlled enterprises 35
2.2.18.          Other fixed assets of State-owned enterprises/
State-controlled enterprises and foreign-owned companies relative to domestic
private owned companies (as % of total assets ), 2004-2013 average  36
2.2.19.          Capital expenditure relative to
operating profit (EBITDA) of State-owned enterprises/ State-controlled
enterprises and all Non-financial companies 36
2.3.1.  Reel effective exchange rate deflated by ULCE and
ULCM    39
2.3.2.  REER (ULCE) and new sectoral REER in Slovenia   40
2.3.3.  Sectoral REER aggregate in SI and V4  40
2.3.4.  Nominal Unit Labour Cost 40
2.3.5.  SI NULC in tradable and non-tradable sectors 41
2.3.6.  Productivity per hour worked   41
2.3.7.  Nominal compensation per employee  42
2.3.8.  Geographical and sectoral composition of nominal
rate of change of goods exports 43
2.3.9.  Density distributions of exports (goods) by
quality  43
2.3.10.          Non-cost competitiveness vis-à-vis EU28  43
2.3.11.          Investment in the private sector 44
2.3.12.          Private investment and private
consumption  44
2.3.13.          Potential output and components 45
2.3.14.          Non-Financial Corporations savings and
investment 45
2.3.15.          GFCF by type  46
2.3.16.          Investment by institutional sectors 46
2.3.17.          Non-residential investment and NFC debt 47
2.3.18.          Inward FDI 47
2.3.19.          FDI inflows 48
2.3.20.          FDI inflows in Slovenia, Visegrád 4, EU   48
2.3.21.          FDI stock per sector in Slovenia, 2013  48
2.3.22.          Sectoral composition of greenfield FDI
in Slovenia, 2011-2013  48
2.3.23.          FDI stock in tradable and non-tradable
sectors 49
2.3.24.          Origin of inward FDI, stocks in 2013  49
2.3.25.          FDI stocks in Slovenia, Visegrád 4, and
the EU   49
3.1.1.  Gross debt % of GDP - DSA analysis 54
3.1.2.  Gross debt % of GDP - institutional scenario  54
3.1.3.  Decomposition of the population by age groups in
Slovenia   55
3.1.4.  Sustainability of the pension system in Slovenia   56
3.2.1.  Employment in tradable and non-tradable sector 59
3.2.2.  Long term unemployment as % of active population  59
3.2.3.  Employment rate of vulnerable segments in
Slovenia and the EU28  60
3.2.4.  Cyclicality of temporary employment 61
3.2.5.  % of low achievers on PISA tests in 2009 and 2012
in Slovenia   62
3.2.6.  Public expenditure for formal education (in
million EUR) 62
3.2.7.  The likelihood of the old-age poverty rate  63
3.2.8.  Social exclusion indicators 63
3.3.1.  Components of administrative burden in Slovenia   65
3.3.2.  Willingness of banks to provide the loans in the
last six months 66
3.3.3.  Level of intra-EU establishment 67
3.3.4.  R&D investment 68
3.5.1.  Institutional strengths and weaknesses in
Slovenia   71
3.5.2.  Government effectiveness 72
3.5.3.  Diversion of public funds 73
LIST OF Boxes
1.1.     Economic surveillance process 8
2.1.1.  Measures taken by the Bank of Slovenia to improve
corporate governance and risk management in banks 15
2.1.2.  Structure of debtor companies liable for the NPLs 24
3.3.1.  Overview and general assessment of absorption
capacity for EU funds 68
LIST OF Maps
No table of contents
entries found.
In 2014 the Slovenian economy grew
strongly. After a cumulative decline of more than
9% between 2008 and 2013, real GDP is estimated to have grown by 2.6% in 2014.
Growth has been predominately export-driven but domestic demand has also
started to show signs of recovery. The recovery in investment expenditure has
been driven mainly by construction financed through EU funds, while private
sector investment remains under pressure. Growth is estimated to slow down to 1.8%
in 2015, before increasing to 2.3% in 2016. The unemployment rate remains below
the EU average, falling to 9.8% in 2014 and expected to decline further. Public
debt is forecast to stand at 83% of GDP in 2015 and gradually increase in the
medium term. 
In March 2014, the Commission concluded
that Slovenia continues to experience excessive macroeconomic imbalances. This Country Report assesses Slovenia's
economy against the background of the Commission's Annual Growth Survey which
recommends three main pillars for the EU's economic and social policy in 2015:
investment, structural reforms, and fiscal responsibility. In line with the EU
Investment Plan, it also explores ways to maximise the impact of public
resources and unlock private investment. Finally, it assesses Slovenia in the
light of the findings of the 2015 Alert Mechanism Report, in which he Commission found it useful to examine further the persistence of
imbalances or their unwinding. The main findings of the In-Depth Review
contained in this Country Report are:
·       The high level of non-performing loans and low credit demand from
creditworthy firms may have implications on viability of the banking sector. Although confidence in the banking sector has returned, credit
growth remains negative and profitability and viability of the banks can be
further enhanced. Non-performing loans to non-financial corporations are still
high relative to pre-crisis levels. Continued weakness in the cash flow
capacity of the firms constrains lending opportunities and presents further
risks to the asset quality and profitability of the banking sector.  
·       High debt, deleveraging pressures and the on-going restructuring in
the corporate sector have negative implications on private investment and
growth. The corporate sector has been deleveraging
since the peak in 2010 but remains undercapitalised, which affects the sector's
investment capacity. Low investment has implications on productivity and
competiveness of the companies, their ability to innovate and also erodes
Slovenia's potential growth.
·       High involvement of the state and weak corporate governance distorts
resource allocation, and hampers investment and growth. The state is the largest employer, asset manager and corporate
debtor in Slovenia.  The state involvement in the economy had significant
fiscal and economic implications for Slovenian economy since the onset of the
crisis. State-owned entities have underperformed compared to their
private-owned peers in terms of productivity and profitability both at national
and peer country level.  
·       External competitiveness and external sustainability have improved
considerably and risks appear to have subsided.
Wage restraint since 2011 together with increased productivity and gains in
non-cost competitiveness have helped to improve significantly Slovenia's
external performance and position in terms of flows and stocks. 
·       The large increase in public debt in recent years creates additional
challenges. A prolonged recession coupled with
significant bank recapitalisations has resulted in a sharp rise in public debt.
Slovenia has undertaken fiscal consolidation in recent years but the measures,
particularly on the expenditure side, have been of a temporary nature and
reforms of the fiscal framework have lagged. Furthermore, the ageing population
creates pressures for the sustainability of the pension and long-term care
systems. 
·       The labour market reform addressed segmentation and introduced
greater flexibility. The labour market situation is
showing signs of improvement but structural challenges persist as regards to
long-term unemployment and the low employment rates of low-skilled and older
workers.
·       An improved business environment will assist in attracting foreign
direct investment. The business environment is
hindered by high government involvement and regulation, which poses obstacles
to the inflow of investment. The latter would be important as a source of fresh
equity and alternative funding, technology transfer and increased international
trade integration.
·       There is a renewed commitment to fight corruption and increase the
effectiveness of public administration and the judiciary. The new government adopted a new two-year programme in January
2015, while the strategy for public administration is expected to be adopted in
February 2015. The focus is now on prioritisation and implementation of the
programme.
Overall, Slovenia has made some progress
in addressing the 2014 country-specific recommendations. Policy measures to stabilise the banking sector have been
completed. The Bank Asset Management Company is now fully operational. The
restructuring of four major state-owned banks and the wind-down of two smaller
domestic banks are on track. A corporate restructuring master plan and a
centralised task force were established. A new corporate governance code for
state-owned enterprises was adopted. The Slovenian Sovereign Holding,
responsible for the management and divestment of state assets, is now fully
operational. A draft asset management strategy is yet to be approved by the
Parliament, and will be followed by the release of the divestment schedule for
a number of well-targeted state assets. The privatisation programme is
progressing, albeit with delays. The sales of the two largest assets are to be
signed in April 2015.
The Country Report reveals the policy
challenges stemming from the analysis of macro-economic imbalances, namely:
·       Reinforcing the long-term profitability and reducing non-performing
loans in the corporate sector will further strengthen the health of the banking
sector. There is scope for further consolidation of
the banking sector, which could be facilitated through the continuation of the
privatisation process. 
·       Further deleveraging of the corporate sector would help restore the
conditions for a rebound of private investment. The
swift restructuring of the corporate sector through the application of existing
tools, including the Bank Asset Management Company and the new insolvency
legislation, will boost the recovery of cash-flows in the corporate sector.
Attracting fresh equity investment from abroad can help reduce the high debt
leverage and restore credit worthiness, an important prerequisite for resolving
non-performing loans and improving banks' profitability.
·       Further disentangling the complex network of state-owned enterprises
would help mitigate possible risks to public finances. Slovenia could take advantage from the current positive market
momentum to divest selected state-owned enterprises. This would assist in
attracting foreign direct investment and improving the economic outlook. Sound
management and enhanced corporate governance policies for state-owned assets
can assist in averting risks of future state support. 
·       The right fiscal framework coupled with comprehensive expenditure
reviews can help to enhance the sustainability of public finances. In particular, they would help shift the focus of budgetary
execution from temporary measures and linear across-the-board cuts to targeted
cuts and expenditure rationalisation, while assisting in generating efficiency
savings. The comprehensive review of expenditure in the health sector can
provide a useful blueprint for future reviews in other key policy areas such as
education. While one-off spending reviews can have a major impact, the ultimate
benefits are reaped when they become a regular part of the budget process. 
·       Attracting foreign direct investment will be essential in ensuring a
sustainable recovery. The new Government has set an
ambitious target of reaching the EU average stock of foreign direct investment
by 2017. The forthcoming strategy could include a coherent set of both
facilitation and promotion measures, including substantially reducing the
administrative burden on both local and foreign companies. 
Growth performance
With a loss of more than 9% of GDP,
between 2008 and 2013, Slovenia experienced one of the largest economic
contractions among euro area countries. A
foreign-financed credit boom facilitated by the euro adoption fuelled aggressive
leveraging of the corporate sector and a construction bubble. After a sharp
contraction in 2009, the economy rebounded in 2010 and 2011, but entered a
second recession in 2012. While initially a large contraction in investment was
the main driver of the downturn, consumption began to decline from 2012 onwards
(Graph 1.1). Because of the missed pre‑crisis
opportunity to improve the resilience of the economy to shocks and its slow and
insufficient response, Slovenia was more affected by the crisis than other
member states.
 Graph 1.1:     Real GDP growth and contributions 
 Source: Eurostat, European Commission. 
In 2014, Slovenia began to re-emerge
from the recession. The Commission 2015 winter
forecast  ("Commission Forecast" hereafter) projects real GDP to
have grown by 2.6% in 2014 (Graph 1.1). Growth has been predominately
export-driven but domestic demand has also started to show signs of recovery.
Private consumption supported by improving sentiment and decreasing
unemployment (9.8% in 2014) have contributed to this improvement. The recovery
in investment expenditure has been driven mainly by construction co-financed
through EU funds. While potential growth has begun to recover, it remains
significantly below pre-crisis levels, with labour and capital accumulation
providing no contribution in 2014(Graph 3.3.13).
Growth is expected to continue. In 2015, economic growth is forecast to decelerate to 1.8%, before
picking up to 2.3% in 2016 (Graph 1.1). The deceleration in 2015 is expected
to be driven by a slowdown in the growth of public investment. However, private
investment in equipment and machinery is expected to pick up progressively and
support growth going forward. The acceleration in 2016 is mainly attributable
to an assumed resumption in growth of public consumption.
Trade performance, current account and NIIP
On the export side, Slovenia has
regained export market shares since 2013. This
trend strengthened in the first half of 2014 following the substantial market
share losses suffered between 2008 and 2012 (Graph 1.2). Other indicators, such as the
Commission's export performance indicator ([1]) offers a slightly more positive picture already as of 2010 (Graph 1.3). Despite a significant underperformance
in 2009, export performance measured by this indicator evolved thereafter in
line with the EA and outperformed it in 2011. Even though Slovenia lagged
behind peers such as the catching up Visegrád member states Czech Republic,
Hungary, Poland and Slovakia between 2009-2012, the gap was reduced
significantly in 2013.
 Graph 1.2:     Export market share 
 Source: Eurostat, WTO. 
 Graph 1.3:     Export performance 
 Visegrád 4 – export weighted average Source: European Commission. 
The current account surplus widened to
4.8% of GDP in 2013, mainly due to the increase in the trade balance (Graph 1.4). While services make up most of the
trade surplus, the goods balance also turned positive in 2012 and is expected
to have increased further in 2014. The rebound in exports has not yet been
matched by a comparable recovery of imports, due to weak domestic demand,
especially investment. Therefore, the change in the trade balance is
predominantly driven by an increase in exports, rather than by a fall in
imports (Graph 1.5). The income balance remains in deficit
at average levels for a converging economy with a relatively high share of
foreign capital. The balance of current transfers continues to play a marginal
role in the current account balance.
 Graph 1.4:     Current account   
 Source: European Commission. 
 Graph 1.5:     Drivers of the trade balance surplus, 2007-2014 
 Change in trade flows, current prices, 2007-2014(e). Source: AMECO. 
After years of deterioration, net
international investment position has started to improve (Graph 1.6). From a moderate negative level of
-17.1% of GDP in 2006, the net international investment position deteriorated
rapidly during the crisis, reaching its lowest level of -45.8% of GDP in 2012.
The adjustment of the current account on the back of a rise in net exports
helped to revert the trend in 2013 and 2014. Driven by strong current account
surpluses the NIIP is expected to continue to improve in 2015-2016. Two
counteracting trends have led to a structural change of the net international
investment position - the significant reduction of net foreign liabilities of
monetary and financial institutions since the peak of the crisis (Section 3.1),
and the increase of general government borrowing on the international markets
to finance the high 2013 deficit ([2]). This is consequently reflected in the increasing share of
government debt securities which now form the biggest component (-18.8% of GDP)
of the net international investment position in relative terms. Foreign direct
investment is on the other hand limited to only -15.9% of GDP. In view of the
negative net international investment position, current account surpluses are
required in order to improve Slovenia's external position. The current account
is expected to stabilise at around 6% in 2015 before starting to decline
slowly, due to an expected progressive reduction in the trade balance surplus
in line with accelerating domestic demand. Nevertheless, an elevated current
account surplus is expected to persist as long as deleveraging continues.
 Graph 1.6:     Net international investment position 
 Source: European Commission. 
Public sector debt has increased
significantly from 22% of GDP in 2008 to 82% in 2014. While exceptional items, particularly bank recapitalisations, have
significantly contributed to this increase, sustained primary deficits over the
period have also attributed to the large increase in public debt. On a
no-policy change basis, public sector debt is expected to steadily increase to
87% of GDP in the medium term (i.e. until 2025). Fiscal discipline is required
to reduce the debt to GDP ratio (see Section 4.1).
Private sector deleveraging
Private sector indebtedness is among the
lowest in the euro area, reflecting one of the lowest levels of household debt,
but relatively high corporate debt. Despite
doubling in the 2000s, private debt remained at a comparatively low level of
103.6% of GDP in 2013. However, there are substantial differences between the
corporate and household sector. At 29.6% of GDP in 2013, Slovenia's households
had the 2nd lowest level of indebtedness in the euro area.
Conversely, the indebtedness of Slovenia's corporates is considerably higher,
at 74% of GDP in 2013. While this is still close to the euro area average, the
ratio of the corporate debt to equity is relatively high (Graph 1.7). Further analysis of firm level data is
required as corporate debt in Slovenia is unevenly distributed across firms and
is high when compared to their earnings and cash flow capacity to repay
(Section 3.1). Non-financial corporations began to deleverage actively ([3]) in 2010 and reduced their indebtedness relative to GDP by 13 pps.
by 2013. 
 Graph 1.7:     Private non-financial sector debt-to-equity ratios in the EU (%) 
 Source: Eurostat, European Commission. 
Debt in the corporate sector remains
high relative to firm's capacity to repay and is concentrated in a small number
of large firms. About 100 firms with the largest
excess debt ([4]) held 42% of
the total excess debt in 2013 ([5]). The ratio of excess debt to net financial debt varies from sector
to sector. Excess debt accounts for 92% of net financial debt in financial and
insurance activities, and 78% in real estate activities (it is primarily
unprofitable firms that contribute to the high figures), while manufacturing
has one of the lowest figures at 26.2%. In addition, 90% of these over-indebted
companies are focused on the domestic market and their capacity to repay the
debt is thus dependent on a recovery in domestic demand ([6]).
Slovenia deleveraged actively resulting
in negative credit flows but faced headwinds from contracting GDP until 2013. The change in the debt-to-GDP ratio can be split into four main
drivers: net credit flows (loan repayments and lack of new lending), real GDP
growth, inflation through the GDP deflator and other changes such as valuation
changes (Graph 1.8). Since the peak of indebtedness in
2010, Slovenia's corporations deleveraged actively resulting in negative credit
flows but contracting GDP exerted upward pressure on the ratio. In 2014 this
has changed (real GDP is estimated to have increased by 2.6%) and Slovenia is
again benefitting from this deleveraging channel. In addition, valuation
changes and restructurings have also contributed positively to the corporate
debt reduction. However, with inflation at historically low levels (0.4% in
2014 and forecast at -0.3% in 2015), the borrowers can no longer depend on
inflation to reduce the real value of their debt. 
 Graph 1.8:     Deleveraging contribution dynamics, debt-to-GDP change 
 Source: Eurostat, European Commission. 
Active deleveraging has had a negative
impact on domestic demand. Investment has been
particularly affected in Slovenia. While saving rate of non-financial
corporations remained largely unchanged, investment took the biggest hit in
Slovenia compared to the euro area (Graph 1.9). Unless reversed, this trend will have
negative consequences on productivity and economic growth in the medium and
long term (more information on investment in section 3.3).
Deleveraging is expected to continue,
albeit at a slower pace. Weak credit market
conditions and the remaining high indebtedness of the corporate sector relative
to earnings create pressure for further active deleveraging. This process is
likely to be characterised by continued loan repayments and limited new lending
activity. The Commission estimates ([7]) that the corporate sector will keep facing deleveraging pressures
in the short term. However, deleveraging needs of the households appear limited
and the household sector's balance sheet is expected to stop contracting in
2015. Going forward, expected GDP growth would contribute to reducing
Slovenia's debt burden. This in turn would reduce the drag on aggregate demand
and stress for asset markets. 
 Graph 1.9:     Non-financial companies - change in investment 2008-13, % of value added 
 Source: Eurostat. 
Employment and social conditions
The labour market showed signs of
improvement in 2014. After 5 years of rising
unemployment, the trend started to reverse. However, structural challenges
remain. Long-term unemployment increased in 2014 making up over half of the
total unemployed. Youth unemployment rate stabilised marginally below the EU
average. The number of people at risk of poverty or social exclusion has risen
consistently since 2009.
Inflation 
Three different inflationary patterns
are identified over the years in Slovenia. During
the years preceding the financial crisis Slovenia experienced increasing
inflation, which remained consistently above the euro area average and peaked
at 6.5% in the first quarter of 2008. Between 2009 and 2012, core inflation
remained at low levels and HICP developments were mainly attributable to
changes in energy and unprocessed food prices. In the following period core
inflation stabilised, but since the third quarter of 2013 it has gradually
declined reflecting weaker domestic demand and declining import prices. In
2014, the steep fall in the oil price and declining food prices had a significant
impact in driving headline inflation lower. Taking into account the improving
consumer confidence and its lag with the headline inflation, the decreasing
trend of HICP is expected to bottom out in the second quarter of 2015.
Deflation of 0.3% is projected in 2015 before returning to a moderate inflation
rate of 0.9% in 2016 as the economic recovery strengthens (Graph 1.10).
 Graph 1.10:    HICP and consumer confidence 
 Source: EUROSTAT, European Commission. 
  Box 1.1: Economic surveillance process The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors.   In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation no. 1176/2011 — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published on November 2014.   Based on the 2014 IDR for Slovenia published in March 2014, the Commission concluded that Slovenia was experiencing excessive macroeconomic imbalances requiring decisive policy action, in particular the risk stemming from an economic structure characterised by weak corporate governance, high level of state involvement in the economy, losses in cost competitiveness, the corporate debt overhang, and the increase in government debt.   This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Slovenia concerned fiscal policy and long-term fiscal stability (including pension reform and long-term care); effective tailor-made active labour-market policy measures, skills mismatches, wages and labour market segmentation; restructuring of the banking and corporate sectors, including Slovenian Sovereign Holding; privatisation; selected aspects of the business environment; and fighting corruption. 
 Table 1.1:       Key economic, financial and social indicators - Slovenia 
 Source: Eurostat, ECB, AMECO. 
 Table 1.2:       MIP scoreboard indicators - Slovenia 
 Source: European Commission, Eurostat and DG ECFIN (for the indicators on the REER). 
Balance sheet contraction, rising
non-performing loans, erosion of capital buffers and liquidity pressures
affected the Slovenian banking system from the onset of the crisis. All Slovenian banks, large state-owned banks in particular, have
suffered sizeable losses and have significantly shrunk their balance sheets
since the beginning of the crisis in 2008. The first phase of deleveraging was
triggered by the international financial crisis. Many Slovenian-specific
elements such as the high debt leverage of the corporate  sector, the
significant involvement of the state in the economy and short-comings in risk
management and corporate governance, were revealed and reinforced by the
crisis, triggering a sharp increase in non-performing loans in banks. These
credit quality trends, together with deteriorating collateral values, quickly
eroded capital bases and market confidence. 
State of play of banking and corporate
restructuring
Following the extensive overhaul of the
banking system in 2013 Slovenia has taken further policy action to stabilise
the banking sector in 2014. On 12 December 2013 the
Slovenian authorities announced their strategy for the restructuring of the
financial sector based on the outcome of the Asset Quality Review and Stress
Test. The Stress Test identified capital deficits of up to EUR 4.8
billion, EUR 3.2 billion of which was provided by the state in December 2013.
These measures were reinforced by several further policy actions to stabilise
the banking sector in 2014. The recapitalisation of Banka Celje with EUR 190
million together with a transfer of assets of EUR 412 million (gross
value) in December have been the latest measures taken by the Slovenian
authorities. Overall six banks have received capital amounting to EUR 3.6
billion (Table 2.1.1). Foreign banks that took part in the
2013 stress test exercise (UniCredit Bank, Raiffeisen Bank, Hypo Group Alpe
Adria) have also substantially improved their capital positions mainly through reduction
of risk-weighted assets and/or direct capital injections by their parent banks.
Although the results of the ECB comprehensive assessment published in October
2014 identified a joint capital shortfall of EUR 65.3 million for both NKBM and
NLB ([8]), the
exercise found that the measures taken to improve structural profitability and
the retained earnings of the banks in 2014 will cover the shortfalls identified
for both banks. Bank of Slovenia has sought an appropriate follow-up of the
shortcomings identified by the Asset Quality Review exercise of 2013 and has
introduced two macro-prudential initiatives targeted at
easing competition for deposits – (i) a cap on deposit interest rates
introduced in 2012 and (ii) minimum requirements for the ratio of annual
changes of the stocks of loans to non-bank deposits to slow the rapid decline
in the loan-to-deposit ratio (Box 2.1.1).
The Bank Asset Management Company has
set out its strategy and business plan and is now fully operational. The Bank Asset Management Company has so far received assets with a
total gross value of approximately EUR 5.0 billion (net value of EUR 1.7
billion) from four state-owned banks (Nova Ljubljanska Banka - NLB, Nova
Kreditna Banka Maribor - NKBM, Abanka and Banka Celje) and two smaller domestic
banks in wind-down - Probanka and Factor Banka (Table 2.1.1). Approximately two thirds of the
exposures are in default. The objective of the Bank Asset Management Company
for these loans will be to acquire the collateral (mostly real estate but also
some equity and company assets). The remaining approximately 100 cases in the
portfolio of the Bank Asset Management Company are companies with potentially
viable core activities, which could be maintained if they were subject to an
appropriate financial and operational restructuring.
 Table 2.1.1:     Overview of executed recapitalisation measures and asset transfers to the BAMC 
 Source: Bank of Slovenia,  Commission services. 
The restructuring of the highly
leveraged corporate sector remains a key challenge for the banking sector and
the Slovenian economy as a whole. The Ministry of
Finance supported by the Bank of Slovenia has set up a comprehensive
restructuring master plan. A task force has been established to monitor and
coordinate the overall restructuring process, to facilitate the negotiation
process between all stakeholders involved and to provide the necessary guidance
and advice. The coordinating body of the task force is composed of
representatives of the Ministry of Finance, the Bank of Slovenia, the Ministry
of Economics, the Ministry of Justice and the Bank Asset Management Company and
meets twice a month. 
Credit and financial developments since
mid-2013
The restored confidence in the Slovenian
banking system has eased liquidity pressures.
Confidence in the major state-owned banks has returned and there has been an
inflow of retail funds since the beginning of 2014 (Graph 2.1.1). The market exit of Probanka and
Factor Banka, two smaller banks that were competing intensively for deposits
until September 2013, could have relieved the competition on deposits. Since
mid-2013 deposit rates decreased by approximately, 150-200 basis points (Graph 2.1.2 and Graph 2.1.3). The closure of the gap in interest
rates for deposits between state-owned and foreign-owned banks results from
various factors, particularly the improved funding conditions of state-owned
banks, the cap on deposit interest rates and the restoration of consumer
confidence in state-owned banks.      
 Graph 2.1.1:   Household deposit of sector - total deposits by type of bank 
 Source: Bank of Slovenia, Fitch. 
 Box 2.1.1: Measures taken by the Bank of Slovenia to improve corporate governance and risk management in banks  Following the conclusion of the asset quality review (AQR) and the stress test carried out in 2013, which revealed serious shortcomings in the banks’ business processes and risk management practices, Bank of Slovenia asked all banks involved in the exercise to respond to the AQR findings that affected them. Three banks that benefited from state aid were asked to submit an action plan by the end of March 2014 to address the deficiencies identified in the AQR and to implement their plan before the end of 2014. Implementation of these action plans is being assessed by Bank of Slovenia in cooperation with the single supervisory mechanism (SSM). The banks have improved practices in many areas, especially underwriting standards and NPL work-out. Since December 2014, NPL and forbearance definitions are in line with EBA definitions in all banks. New and tighter corporate governance rules were introduced during 2014, in line with international standards. Further measures could be taken to address some shortcomings identified by the AQR in 2013 (e.g. on IT, data and quantitative aspects), but overall, risk management practices appear to have significantly improved during 2014 Bank of Slovenia has also introduced some additional regulations regarding banks’ corporate governance, relating to the membership and functioning of banks’ boards, strengthening the provisions on the management of credit, market and operational risks, on the internal control functions (i.e. internal audit, compliance and information security) and diligence of members of the management body, risk management and remuneration. Bank of Slovenia has also taken steps to improve its own effectiveness on banking supervision and in the area of corporate governance. In 2012, Bank of Slovenia requested an IMF review of its supervisory practices. On the basis of IMF’s recommendations, a detailed action plan was drawn up. In spring 2014, Bank of Slovenia carried out an internal reorganisation and again requested IMF technical assistance. Among other issues, this identified a lack of supervisory staff. A new central credit registry (CCR) for corporates and private persons is also being set up. This is expected to be operational from 2016 and will be connected to the other CCRs within the euro area to be used for micro- and macro-supervision and research purposes. During 2013 and 2014, with the instability in the banking sector and the AQR and stress test that followed, Bank of Slovenia’s on-site supervision activity was stopped due to lack of resources. On-site supervision activities will be resumed in 2015. Following a bilateral agreement, the SSM will also support Bank of Slovenia in monitoring non-systemic banks, which will certainly contribute to carrying out supervisory activity with adequate resources, based on high international standards. It will be important to monitor closely how the banks implement the new regulatory guidance on corporate governance and risk management and how they have addressed the shortcomings identified in the two AQRs to make sure the events of the recent past are not repeated. 
Policy measures taken in 2013 and 2014
have facilitated the deleveraging of banks' balance sheets. Since 2012, negative credit flows have led to a steady decline of
the loan stock, in particular in the state-owned banks. The deleveraging
process that is currently underway has contributed to this decline. However,
there are several one–off factors that have also affected the stock on an
aggregate level. The commencement of the orderly wind down of Factor Banka and
Probanka and the additional significant amount of provisions required as a
result of the 2013 asset quality review further contributed to the strong
decline in 2013. The significant fall at the end of 2013 was driven by the
transfers of non-performing loans from NLB and NKBM to the Bank Asset
Management Company (Graph 2.1.4). The additional transfers to the Bank
Asset Management Company from Abanka in October 2014 and Banka Celje in
December 2014 further reduced the aggregate level across the system.
 Graph 2.1.2:   Deposit rates (< 1 year) 
 Source: Bank of Slovenia. 
The improvement of the funding situation
and the reduction of the loan books allowed banks to repay most of their ECB
borrowing and a significant portion of their interbank debt (Graph 2.1.5). Slovenian banks participated in the
September and December 2014 Targeted Longer Term Refinancing Operations for EUR
706 million (71% of potential volume).
 Graph 2.1.3:   Deposit rates (> 1 year) 
 Source: Bank of Slovenia. 
The funds helped the banks to continue the
early repayment of the three-year Longer Term Refinancing Operations settled in
2011 and 2012, of which 90% have been repaid. NLB regained access to funding in
the international capital markets in July 2014 supported by favourable
market conditions ([9]).In view of
the improved funding situation in the banking system the deleveraging pressure
on domestic banks is expected to ease going forward. Foreign banks have also
deleveraged although the size of their balance sheets have been reducing at a
slower pace ([10]). Many
foreign-owned banks (Raiffeisen Bank ([11]), Hypo Group Alpe Adria) have actively reduced their exposure to
the Slovenian market and repaid part of the intra group lending to their parent
institutions (see the significant increase of foreign loans in foreign banks in
Graph 2.1.15). Although loan to deposit ratios of
foreign-owned banks have decreased faster than in domestically-owned banks they
are still higher due to the outstanding stocks of intra group funding.
 Graph 2.1.4:   Total assets and loans of the Slovenian banking system 
 Source: Bank of Slovenia. 
 Graph 2.1.5:   Composition of banks' liabilities 
 Source: Bank of Slovenia. 
After the significant losses of the past
three years, the banking sector has returned to profitability in 2014. Net interest margins and profitability have started to recover
(Graph 2.1.6). The higher net interest margins are
mainly driven by the sharp reduction of interest rates on non-banking deposits
(Graph 2.1.7). The improved profitability can be
attributed to the significantly lower level of impairments and provisions and
the growth in net interest income. For NLB and NKBM some beneficial effects on
interest income arise from the high yield (approximately 4%) on government and Bank
Asset Management Company bonds the banks received in December 2013 in the
context of recapitalisations and asset transfers. This source of revenue
however is temporary as the bonds mature in 2015-2016. The government and Bank
Asset Management Company bonds received by Abanka and Banka Celje in 2014 were
issued at significantly lower yield in line with the market developments
(approximately 1.5%).
 Graph 2.1.6:   Net interest margin by bank 
 Source: Fitch. 
 Graph 2.1.7:   Growth rate of interest income and expenses of the banking sector 
 Source: Bank of Slovenia. 
Remaining challenges
Lending to the real economy remains
constrained. Credit growth in Slovenia continues to
be negative (Graph 2.1.8), although a large part of that
negative growth is due to the one-off transfer of non-performing loans to the
BAMC. The negative credit growth is more pronounced for domestic-owned than for
foreign-owned banks, partly due to the speed of deleveraging of domestic-owned
banks but also due to differences in market behaviour and the banks' risk
aversion (Graph 2.1.9). The negative trend in lending to
non-financial corporates is closely linked to the low cash-flow capacity and
high leverage of the Slovenian corporate sector, the remaining high level of
corporate non-performing loans on banks' balance sheets and the on-going
financial and operational restructuring in the corporate sector. The number of
creditworthy corporates requesting loans in the domestic market is low and
competition for these clients is intense. Most of the nationally recognized, well-established
and financially sound companies have access to financing abroad at more
competitive rates, as loan rates (especially short-term) in Slovenia generally
remain above those of their regional peers (Graph 2.1.10 and 2.1.11), or are taking the opportunity to
tap international and domestic capital markets ([12]). Consequently, competition between domestic banks has further
increased and has started to exert pressure on corporate lending rates, which
could adversely impact net interest margins and profitability of the banks
going forward.
 Graph 2.1.8:   Change in stock of domestic credit and contributions 
 Source: Bank of Slovenia. 
 Graph 2.1.9:   Credit growth - Total loans 
 Source: Bank of Slovenia. 
 Graph 2.1.10: Short term interest rates (< 1 year) 
 Source: ECB. 
 Graph 2.1.11: Long term interest rates (>1 year) 
 Source: ECB. 
The high debt leverage of the corporate
sector is adjusting, but profitability and creditworthiness of borrowers has
not yet significantly improved. The leverage
ratio ([13]) increased
from a moderate multiple of 4.8 before the crisis (2007) to its peak of 6.7 in
2009 (Graph 2.1.12), ([14]) also mirrored by an increase in the debt to total assets ratio.
Deleveraging started in 2010 and has been progressing since then, though in
different stages, which has formed three different categories of debtors (Box 2.1.2). In 2010 - 2011, deleveraging was
mainly driven by market exits (bankruptcies or firm takeovers). Since 2012
financial liabilities of ongoing businesses have been declining (by EUR 0.4
billion in 2012 and by further EUR 0.5 billion in 2013) ([15]). The reduction of financial liabilities in viable firms is
expected to have accelerated further in 2014 based on most recent data.
Nevertheless, profit margins have not improved since their collapse during the
crisis. This can be seen both in terms of operational profitability (Earnings
before interest, taxes, depreciation and amortization - EBITDA margin ([16])), indicating that the capacity of the corporate sectors to
generate cash flows and repay debt has not yet fully recovered. It is also
evident from net profit margins, which remains squeezed due to high debt
service costs (Graph 2.1.13).
 Graph 2.1.12: Indebtedness of the corporate sector 
 Source: AJPES, Commission services. 
 Graph 2.1.13: Cash flow capacity and profitability of the corporate sector 
 Source: AJPES, Commission services. 
 Graph 2.1.14: Credit growth - corporate loans (incl. SME) 
 Source: Bank of Slovenia. 
 Graph 2.1.15: Credit growth - foreign loans 
 SID Banka not included Source: Bank of Slovenia. 
The 3 major state-owned banks are
particularly affected by the increased competition and the lack of good-quality
credit demand. While state-owned banks are bound by
the commitments provided in the context of the state aid restructuring
procedures (i.e. minimum return on equity on new loans, maximum cost income
ratio), foreign-owned banks have more flexibility. As a consequence of the new
risk management policy of state-owned banks, loans to clients rated below B can
in practice only be provided if they are highly collateralised or secured with
a guarantee (e.g. by another bank, a parent company, a subsidiary or the
state). Various lending support schemes have been launched by SID Banka (the
Slovenian development bank) to enhance lending to SMEs, but few companies
appear to meet the criteria, so the funds remain largely undrawn (Section 4.3).
In state-owned banks, lending has
focused on the roll-over of stocks related to restructurings with new lending
lower than in foreign-owned banks (Graph 2.1.16). One reason may be that the focus of
the domestically owned banks is the on-going work-out of corporate non-performing
loans which is resource intensive. A proportion of the "new lending"
from foreign-owned banks is not targeted at the local economy but is linked to
the reduction of the intra group lending from their parent institutions (Graph 2.1.15). 
 Graph 2.1.16: New lending vs. prolongation 
 M – Major state-owned banks, O - Other domestic banks, F – foreign-owned banks SID Banka is not included Source: Bank of Slovenia. 
The level of non-performing loans
remains elevated compared to pre-crisis level, despite the transfers made by
banks to the Bank Asset Management Company. In
November 2014 the volume and level of NPLs in the banking system decreased to
EUR 5.1 billion due to the transfer of non-performing loans to the BAMC and
stands at a level of 13.1% ([17]).  Nevertheless, the major state-owned banks have systematically
higher non-performing loan ratios than foreign-owned banks although the former
have benefitted from a transfer to the BAMC (Graph 2.1.18). The still high volume of non-performing
loans in domestic banks (Graph 2.1.17) is the result of the selective and
only partial transfer of non-performing loans to the BAMC, a still
deteriorating quality of the domestic loan portfolio, the introduction of a
stricter non-performing loan definition (to align with EBA guidance) and the
poor asset quality in the foreign direct lending portfolios (which were not
transferred to the Bank Asset Management Company). The increased restructuring
efforts will materialise in the NPL levels with a time lag as key credit risk
indicators will only adjust once operational restructuring is implemented and
this takes time. In addition, restructured loans have to remain classified as non-performing
loans for at least one year after the restructuring is concluded. System wide non-performing
loans ratios are also affected by the contraction of new lending and the
subsequent reduction of the loan stocks, particularly for banks that are
winding down.
 Graph 2.1.17: NPLs by type of bank 
 Q4 14 contains data until November 2014. Source: Bank of Slovenia. 
 Graph 2.1.18: NPL ratios by type of bank 
 Q4 14 contains data until November 2014. Source: Bank of Slovenia. 
The majority of the non-performing loans
are concentrated in the domestic corporate loan book. Only in the state-owned banks and in the banks in wind down the
proportion of foreign corporate non-performing loans remains at levels above
30% (Graph 2.1.19).  Foreign non-performing loans were
not transferred to the Bank Asset Management Company and constitute about 22%
of the total remaining stock of non-performing loans in all banks. They mainly
consist of lending to companies outside Slovenia (mostly ex-Yugoslav countries,
Bulgaria, Romania) but also lending of subsidiaries of the domestic banks in
ex-Yugoslav countries, Bulgaria and Romania. Foreign non-performing loans are
diverse in terms of sector and size and are often based on bilateral agreements
It is therefore resource intensive to find a systematic solution to
restructuring these wide ranging exposures. 
Coverage ratios close to 60% reinforce
the capacity of banks to absorb some losses from their non-performing loans
portfolios. The relatively high coverage ratios ([18]) show that the remaining stocks of non-performing loans are better
provisioned than in the past three years and therefore should pose less of an
imminent risk to the solvency of the banks (Graph 2.1.20). The large state-owned banks report
the highest coverage ratios, mainly due to supervisory actions taken by the
Bank of Slovenia.
 Graph 2.1.19: Structure of NPLs by bank (Q3 2014) 
 Source: Bank of Slovenia. 
Swift restructuring and work out of the non-performing
loans is crucial for enhancing long-term profitability and viability of the
Slovenian banking system, boosting investment, strengthening domestic demand
and supporting the economic recovery going forward.
Enhanced cooperation amongst the different stakeholders, availability of
working capital financing and fresh equity for the companies in restructuring
are important recipes to facilitate and accelerate the work-out process. The Bank
Asset Management Company and the bigger domestic banks follow a long-term
value-based approach to restructuring. Smaller domestically owned banks which
are in the process of winding-down (Factor and Probanka), as well as some of
the foreign-owned banks which have started to reduce their exposure to the
Slovenian market, have a shorter time horizon and seek a quick exit. This may
present challenges when negotiating restructuring plans for companies.
The Bank Asset Management Company has no
lending capacity and domestic banks are reluctant or unable to provide working
capital to companies in restructuring as they are constrained by stricter
lending and risk management policies. Alternative sources of financing like
asset backed securities or corporate bonds could be further developed (Section
4.3). Fresh equity needs to be available to support the deleveraging of the
companies. Debt-to-equity swaps driven by the Bank Asset Management Company
will further increase the level of state ownership in the economy.
Privately-based structured solutions, such as the establishment of special
purpose vehicles, could provide an alternative solution. The role of the
recently established corporate restructuring task-force is to monitor and
coordinate the overall restructuring process and to provide the necessary
guidance and provide solutions to the outstanding issues. 
 Graph 2.1.20: Coverage ratios type of bank 
 Q4 14 contains data until November 2014. Source: Bank of Slovenia. 
Reinforcing the long-term profitability
and reducing non-performing loans in the corporate segment are key to further
stabilise the banking sector. The ongoing
restructuring and rationalisation of the major state-owned banks provides an
opportunity to reduce the cost base in a sustainable manner. Furthermore, there
could be scope to increase the non-interest income of banks. Macro-prudential
measures introduced by the Bank of Slovenia (Box 2.1.1) are supposed to improve the quality
of lending activity, though it is still too early to assess the impact of these
measures. The swift restructuring of the corporate sector by making full use of
all existing tools, such as the Bank Asset Management Company and the new
insolvency legislation, could boost the recovery of the cash-flow capacity of
the corporate sector, which is an important prerequisite for enhancing the
profitability of banks. 
Further consolidation and enhanced
corporate governance of the banking sector could be facilitated through the
continuation of the privatisation process. The
share of state-owned and state controlled banks in Slovenia has been high and
has increased even further after the crisis as a result of the banking sector
restructuring. More than 60% of Slovenian banks' assets are in the hands of
state-owned banks. As a result of weak corporate governance and
interconnectedness with other state-owned and state-controlled enterprises,
Slovenian state-owned banks suffered significant losses during the crisis and
experienced systematically higher non-performing loan ratios compared to
foreign-owned peers (Graph 2.1.18). The rehabilitation of the banking
sector had important fiscal implications for Slovenia, amounting to more than
EUR 5.7 billion from 2007 to date (Section 3.2). Majority of these state
interventions were capital injections covering past losses with a direct
negative impact on both public debt and deficit (approx. EUR 4 billion), while
the remaining were linked to setting up the Bank Asset Management Company ([19]) (EUR 1.7 billion in equity and bonds). Although risk management in
state-owned banks has been improving over the past year, the state does not
have the same incentive structure, economies of scale and expertise (e.g. risk
modelling, IT, data collection) that a large international group can offer to
its subsidiaries. Slovenia has committed to reduce the share of state ownership
in the banking sector. Continuous progress in this area would further help to
halt the negative feedback loop between the sovereign and the banking system.
 Box 3.1.2: Structure of debtor companies liable for the NPLs  Three main categories of debtor companies liable for NPLs can be identified: The first category consists of construction and infrastructure companies, where bankruptcy rates have already peaked and most of the inefficient firms have exited the market. The majority of these exposures have been transferred to the BAMC and a large proportion of the losses have already been recognised by banks. The BAMC needs to enforce the collateral of these loans, realise any possible gains and complete the insolvency procedures. The recovery value obtained by the BAMC, and subsequently the state, will mainly depend on how efficiently the stakeholders and the courts manage the insolvency procedures. The second category consists of highly leveraged financial holdings, management buy-out companies and other highly leveraged medium-to-large size Slovenian companies. The latter include a small number (up to 100) that have a high value and are economically important (2014 in-depth review: approximately 90 % of debt carry-over is concentrated in just a handful of companies), which are mostly reliant on domestic demand, with some state-owned or state-controlled exporters as an exception (e.g. Cimos, Elan). In several cases, these companies have used a relatively large amount of (or exclusively) debt financing to acquire stakes in various businesses and have placed this debt on the balance sheet of the acquired companies. The subsidiary businesses are mostly domestically focused and many of them might have viable core activities. Many of the exposures in this category (both holdings and large companies) have been transferred to the BAMC, though some remain with the banks as a result of not having qualified for transfer. The BAMC and the corporate restructuring task-force should focus on swift financial and operational restructuring of viable companies, which will be crucial for the recovery of investment and of domestic demand in Slovenia. The third category includes NPLs of other large corporates and SMEs with sound core business activities but which, during the boom years, expanded their activities in non-core areas such as real estate or tourism. This category also includes suppliers to companies in the second category that have suffered from reduced orders. Some of the exposures in this category have been transferred to the BAMC, but most of them are still on the banks’ balance sheets, either because they did not qualify for a transfer (e.g. exposures were too small or still performing) or they are with banks that have not (yet) transferred assets to the BAMC. Due to their size, the work-out of many of these companies has yet to begin, and needs to be a priority of the ongoing restructuring efforts. There is more to be done here than in the case of the large companies and holdings, and this will most likely continue to take up significant management resources of the banks. 
The state involvement in the economy
remains elevated and it has incurred significant fiscal and economic
implications for Slovenia since the onset of the crisis, amounting to over EUR
13 billion. The state is the largest employer,
asset manager and corporate debtor in Slovenia. State-owned enterprises and
state-controlled enterprises ([20]) employ one
fifth of the employees working in non-financial companies, and hold
approximately one third of the total corporate assets and the total outstanding
corporate debt. In the period 2007 to 2013 state-owned enterprises/state-controlled
enterprises have significantly underperformed compared to their privately
owned peers in terms of productivity and profitability at both a national and
peer country level. Negative spill-overs from the high state involvement in the
economy and inefficient corporate governance in state-owned enterprises/state-controlled
enterprises distort resource allocation, harm the business environment and
hamper private investment and growth. As a result, the corporate sector remains
undercapitalised and the resolution of non-performing loans is progressing
slowly, which in turn delays the recovery in the banking sector. This section
analyses the complex nexus of state-owned banks, insurance companies and
non-financial companies and the impact on the Slovenian economy.
Importance of State-owned enterprises and State-controlled
enterprises in the Slovenian economy
A complex network of directly and indirectly
state-owned or state controlled banks, non-financial companies, insurance
companies and investment funds continues to weigh on the economy. At the end of 2014, 642 State-owned enterprises/State-controlled
enterprises were identified as linked to the state via a complex
cross-ownership structure. State control is exercised in several ways. Most of
these 642 companies (over 61% in terms of book value of assets), are directly
controlled by the Republic of Slovenia, through a single entity – the Slovenian
Sovereign Holding (SSH) ([21]), or
quasi-directly through the municipalities or the various state management funds
(KAD, PDP([22]), DSU ([23]), Modra Zavarovalnica). Another 32% are indirectly controlled
through the Bank Asset Management Company, the banks, the insurance companies,
and other financial companies (e.g. mutual), which are all fully and directly
owned by the Republic of Slovenia. While the corporate restructuring is
on-going,the state influence is likely to increase through debt-to-equity swaps
in the banks and the Bank Asset Management Company. The remaining 6.5% of state-owned
enterprises/state-controlled enterprises are controlled through other state-owned
enterprises/state-controlled enterprises and their subsidiaries (2.2.1). 
The state is the largest asset manager
and corporate debt holder in Slovenia. Although state-owned
enterprises/state-controlled enterprises represent only about 1% of the total
number of companies in Slovenia, they are highly significant from an economic
perspective ([24]) and are
relatively bigger in size compared to their private owned peers (Table 2.2.2). State-owned enterprises/State-controlled
enterprises account for one third of the assets, a quarter of the value added,
over 40% of the equity value and one third of the financial debt obligations of
non-financial companies. State-owned enterprises/State-controlled enterprises
presence is particularly strong not only in transport, energy and public
utilities, but also in other sectors where state involvement is less pronounced
in peer countries ([25]) (Graph 2.2.1) such as consumer staples, chemical
industry, manufacturing, tourism and leisure ([26]). The state is the largest corporate debt holder in Slovenia
through its prevalent ownership of the banking system (direct owner of more
than 60% of the banking assets ([27])). The state also manages 88% of the pension assets and 60% of all
insurance liabilities. In various cases, the state is present as both an equity
and debt holder. The conflict between the two mandates in particular in
distressed companies requires coordination in order to minimise the risks and
maximise the returns for the state. 
 Table 2.2.1:     The network of state ownership and state control in Slovenia 
 Source: Chamber of Commerce of Slovenia, Commission Services. 
 Graph 2.2.1:   Share of State-owned enterprises/State-controlled enterprises in sectoral value added (as % of total sectoral valued added), 2013 
 Source: Orbis database and Commission Services calculations. 
One third of the workforce in Slovenia
is employed by the state. state-owned enterprises/state-controlled
enterprises employ one fifth (19%) of all the workers in non-financial
companies (approximately 80 000), and roughly additional 15 000 employees in
the financial sector. Together with the 160 000 employees in the public sector
this amounts to 33% (approximately 255 000) of total employment in Slovenia
(Graph 2.2.2). 
 Graph 2.2.2:   Employment, 2013 – public, private and State-owned enterprises/State-controlled enterprises           
 Notes: The employment data for State-owned enterprises/State-controlled enterprises includes the total number of employees in these companies without applying the proportion corresponding to the share of state ownership.  Source: National Statistical office of Slovenia, The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Commission Services calculations.  
 Table 2.2.2:     Relative importance of state-owned enterprises/state-controlled enterprises (as % of total non-financial companies) 
 Note:  The table covers only 561 out of the total 642 companies as it excludes the banks, financial services, insurance and asset management companies (27); as well as companies in insolvency (27); newly established companies in 2014 (26) and one other company for which financial account were not available. The importance of state ownership in the banking sector is described in Section 3.1. Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Chamber of Commerce of Slovenia, Commission services . 
 Graph 2.2.3:   Book value of equity of State-owned enterprises/State-controlled enterprises in Europe (as % of GDP) 
 Source: 2012 OECD data on size and sectoral distribution of State-owned enterprises, Commission services calculations. 
The state involvement in Slovenia is
amongst the highest in Europe. The book value of
equity of state-owned enterprises/state-controlled enterprises relative to GDP
(Graph 2.2.3) is the highest in Europe if majority
state-owned companies (over 50%) are taken into account and the second highest
if minority stakes are also included (between 10% and 50%), while their share
in terms of employment is the third highest in both cases (Graph 2.2.5). According to a set of OECD soft
indicators ([28]), the extent
to which the state owns, controls, or is involved in business in Slovenia
(state control) is above the average in EU or in its Central and East European
peers (Graph 2.2.5), particularly when it comes to
government involvement in the network industries (equity shares in electricity,
gas, rail, transport, air transport, postal services and telecommunications).
Slovenia scores second worst in terms of involvement of the state in business
operation (the extent and type of price controls and regulation) and the use of
command and control regulation by the government (the extent to which
government uses coercive as opposed to incentives based regulation in general
and in specific sector, such as road freight, retail trade, air transport,
railways, professional service). Moreover, free market principles such as price
liberalisation and competitive decision-making based on incentives appear to be
distorted as well relative to peers. 
 Graph 2.2.4:   OECD indicators for product market regulation (2013) 
 Source: 2013 Indicators of product market regulation comprised by OECD. The graphs display different indicators (meaning described in the title of the graphs) on a scale from 0 – least restrictive state involvement/ control, to 6 - most restrictive state involvement/ control. 
 Graph 2.2.5:   Employment at State-owned enterprises/State-controlled enterprises in Europe (as % of total employment) 
 Source: 2012 OECD data on size and sectoral distribution of State-owned enterprises, Commission services calculations. 
State-owned enterprises/State-controlled
enterprises financial performance and productivity ([29])  
State-owned enterprises/State-controlled
enterprises in Slovenia continue to be highly leveraged and many of them remain
at risk of default. The debt leverage of state-owned
enterprises/state-controlled enterprises has been higher than the debt leverage
of all corporates since the onset of the crisis (Graph 2.2.6). Based on aggregated data, the
leverage ratio ([30]) of state-owned
enterprises/state-controlled enterprises stood at 7.2 in 2013 ([31]), above the 6.1 average for all corporates. More significant
differences in the debt leverage of state-owned enterprises/state-controlled
enterprises emerge on sector level. In 14 sectors out of 22 state-owned
enterprises/state-controlled enterprises are highly leveraged (Table 2.2.2). Particularly exposed are companies
in the mining, apparel & wood production, real estate and financial
services sectors ([32]), as their
operating profit ([33]) has been
negative for a prolonged period and hence they are at risk of default.  
 Graph 2.2.6:   Leverage ratio of State-owned enterprises/State-controlled enterprises and all Non-financial companies (excl. energy and public utilities sectors) 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Chamber of Commerce of Slovenia calculations. 
Based on aggregated industry data ([34]), in 2013 state-owned enterprises/state-controlled enterprises
generated net losses in certain sectors. On average
state-owned enterprises/state-controlled enterprises posted weaker financial
results mainly due to the higher net financial losses resulting from
impairments of their non-core assets (e.g. stakes in non-core subsidiaries).
Gross losses were concentrated in the financial services and the metal
processing industries and accounted for 64% of the total losses generated by state-owned
enterprises/state-controlled enterprises. Gross profits were mainly generated
by the energy, chemical industry, and transport & storage industries (70% of
total profits of state-owned enterprises/State-controlled enterprises). 
 Graph 2.2.7:   Profitability (ROCE) of State-owned enterprises/State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (2004-2013 average) 
 Source: Orbis database and Commission services calculations. 
Compared to their privately owned peers
in Slovenia and in other Central and Eastern European countries, State-owned
enterprises/State-controlled enterprises are less efficient in deploying their
resources (capital employed). In 2013,
profitability of State-owned enterprises/State-controlled enterprises in terms
of return on equity ([35]) and return
on capital employed ([36]) was lower
than that of their privately owned peers – both domestic and foreign-owned.
When compared against profitability of domestic private owned companies in
Slovenia as a benchmark, State-owned enterprises/State-controlled enterprises
underperform, while foreign-owned enterprises outperform in some sectors (Graph
2.2.7 and 2.2.8). Relative to State-owned enterprises/State-controlled
enterprises in most other CEE countries, Slovenian State-owned enterprises/State-controlled
enterprises also underperform based on industry level comparison in all sectors
except for energy (Graph 2.2.8). 
 Graph 2.2.8:   Profitability (ROE) of State-owned enterprises/State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (2004-2013 average) 
 Source: Orbis database and Commission services calculations. 
State-owned enterprises/State-controlled
enterprises are amongst the companies with the highest debt leverage relative
to peers in Slovenia and in other Central and Eastern European countries. State-owned enterprises/State-controlled enterprises are relatively
more indebted than their privately owned peers in almost all sectors apart from
the chemical and pharmaceutical sector. Foreign-owned enterprises on the
contrary are relatively less indebted than domestic privately owned companies
in Slovenia in all sectors reviewed (Graph 2.2.9). Slovenian State-owned enterprises/State-controlled
enterprises appear to be more indebted relative to the State-owned enterprises/State-controlled
enterprises in most other Central and Eastern European countries based on
industry level data (Graph 2.2.9). 
State-owned enterprises/State-controlled
enterprises are less productive than their peers in Slovenia and in other Central
and Eastern European countries. Based on total
factor productivity (TFP) estimations ([37]) for State-owned enterprises/State-controlled enterprises and
foreign-owned companies in Slovenia, relative to domestic privately owned 
companies, underperformance of State-owned enterprises/State-controlled
enterprises is observed in the majority of the sectors (Graph 2.2.10).
 Graph 2.2.9:   Leverage ratio of State-owned enterprises/State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (2013) 
 Source: Orbis database and Commission services calculations. 
Given the large share of state owned
enterprises in sectoral value added in some of these sectors (e.g. the chemical
industry and postal services & ICT as described in table 2.2.2), underperformance of state owned
enterprises can bear substantial economic costs. 
 Graph 2.2.10: Total factor productivity of State-owned enterprises/ State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (in %), 2004-2013 average 
 Source: Orbis database and Commission services calculations. 
 Graph 2.2.11: Profitability (ROE) of State-owned enterprises/ State-controlled enterprises by sector in Slovenia and other CEE countries (aggregate), 2013 
 Source:  Orbis database and Commission Services calculations. 
Foreign-owned companies in Slovenia seem
to be more efficient and competitive than State-owned enterprises/State-controlled
enterprises. While labour productivity of State-owned
enterprises/State-controlled enterprises seems to be lower than in
foreign-owned peers in most of the sectors examined, apart from tourism and
other services (Graph 2.2.14), the costs of labour per head is
higher than of those paid by private peers and similar to those paid by foreign
companies (Graph 2.2.12). This indicates lower efficiency and
competitiveness of State-owned enterprises/State-controlled enterprises
relative to their foreign-owned and private owned peers.
 Graph 2.2.12: Costs per employee of State-owned enterprises/ State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (2004-2013 average) 
 Source: Orbis database and Commission services calculations. 
 Graph 2.2.13: Debt leverage ratio of State-owned enterprises/State-controlled enterprises in Slovenia and other CEE countries (2013) 
 Notes: Due to negative value of the denominator (EBITDA) the estimates for Romania and Bulgaria are not relevant. Source:  Orbis database and Commission services calculations. 
 Graph 2.2.14: Labour productivity State-owned enterprises/ State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (in %), 2004-2013 average 
 Source: Orbis database and Commission services calculations. 
Fiscal and economic implications of state
ownership in Slovenia 
The total fiscal and economic
implications of state involvement in the economy for the period 2007-2014 are
estimated at over EUR 13 billion or just over one third of 2013 GDP. The total fiscal and economic implications of State-owned
enterprises/State-controlled enterprises is considered as the sum of a number
of transactions estimated in the following categories: (i) state interventions
related to the rehabilitation of the banking sector ([38]), (ii) foregone profits of State-owned enterprises/State-controlled
enterprises when compared to overall profitability achieved for all Non-financial
companies by sector ([39]), (iii)
subsidies paid by the state to companies which either became insolvent, or need
external support to maintain operational profitability, (iv) equity increases
of State-owned enterprises/State-controlled enterprises paid directly by the
state, (v) drawn guarantees, and (vi) debt assumptions by the state. The
potential future fiscal implications stemming from the drawing of outstanding
guarantees and other contingent liabilities are not included in the number.
While by far the largest portion of the costs is due to financial sector
stabilisation measures (43%), considerable amount was also associated with
wider economic implications in terms foregone profits of State-owned
enterprises/State-controlled enterprises compared to their private peers (38%).
The former has no direct impact on public finances and is estimated just to
demonstrate the amount of potential lost value added for the state and the
economy. EUR 8.2 billion (62% of the total and 22% of GDP) have direct
budgetary impact – either through increase of government deficit, debt or both
in most of the cases (Table 2.2.3). 
 Table 2.2.3:     Total fiscal implications of State-owned enterprises/ State-controlled enterprises to the state and the economy 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations, Commission Services. 
A quarter of the increase of public debt
from 2007 to 2014 can be attributed to state interventions related to financial
and non-financial State-owned enterprises/State-controlled enterprises. Slovenia's gross consolidated government debt almost quadrupled
from 2007 to 2014 (from EUR 7.9 billion to EUR 30.3 billion at the end of
2014). In terms of GDP it increased from 22.7% to 82.2%. A quarter of this
increase (EUR 5.7 billion or 15 percentage points) was due to costs related to State-owned
enterprises/State-controlled enterprises,  such as capital injections, debt
forgiveness, drawn guarantees as well as EUR 1.5 billion of Bank Asset
Management Company bonds issued to enable the transfer of Non-performing loans
to the Bank Asset Management Company (Graph 2.2.16). In addition, government deficit was
also negatively impacted, particularly by the recapitalisations of the
state-owned and state-controlled banks during the crisis (Graph 2.2.15). 
 Graph 2.2.15: Total government deficit and deficit increasing state interventions related to State-owned enterprises/State-controlled enterprises 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations, Commission Services. 
State-owned enterprises/State-controlled
enterprises continue to pose considerable fiscal risks. About EUR 6.4 billion of contingent liabilities to the state budget
are currently outstanding in the form of guarantees (18% of 2013 GDP). The
significant state involvement in the economy in terms of State-owned
enterprises/State-controlled enterprises high share in total assets, equity and
liabilities of the corporate sector, particularly in the banking and the
insurance sector increase the risks to public finances going forward.
 Graph 2.2.16: Total government debt and debt increasing state interventions related to State-owned enterprises/State-controlled enterprises 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations, Commission Services. 
An important part of the profitability
of State-owned enterprises/State-controlled enterprises and the corporate
sector as a whole is supported by soft budget constraints ([40]) in the form of subsidies. The
Slovenian economy is increasingly supported by various forms of subsidies,
which is a source of moral hazard at management level and may adversely distort
decision-making in companies, particularly decisions related to investment. In
2007-2013 the inflow of subsidies to the corporate sector amounted to
approximately EUR 400 million per annum. In several sectors, the share of
subsidies is greater than 20 % of operating profits (EBITDA). These are
agriculture (50%), mining (78%), public utilities (26%), media (60%) and public
administration, education and health (21%). State-owned enterprises/State-controlled
enterprises received one third of all subsidies in 2013. One of the main
beneficiaries of the subsidies was the Slovenian Railway holding (accounting
for approximately 50% of all subsidies). 
 Graph 2.2.17: Subsidies to all Non-financial companies relative to operating profit (EBITDA) and share of subsidies to State-owned enterprises/ State-controlled enterprises 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations. 
Soft budget constraints combined with a
limited strategic and financial management capacity distorted resource
allocation and negatively affected the profitability of State-owned enterprises/
State-controlled enterprises. In line with the
higher debt leverage, capital expenditure at State-owned enterprises/State-controlled
enterprises was higher than at all corporates (Graph 2.2.19) both relative to operating profit
and sales. This should have translated into higher profitability of State-owned
enterprises/State-controlled enterprises compared to all corporates. Instead,
available financing has been channelled to unproductive investments – i.e. less
profitable (or loss-making) non-core activities as evident by the relatively
higher share of non-core assets on the balance sheet of State-owned enterprises/State-controlled
enterprises compared to private peers (Graph 2.2.18). ([41]) As these investments are less profitable than the core activities
of the parent company, the overall profitability (return on equity) is
negatively affected through impairments of these non-core assets. The highest
level of non-core investment of State-owned enterprises/State-controlled
enterprises is in the financial and insurance activities, which includes
financial holding companies, in professional, scientific and technical
activities, and in consumer staples and retail.
 Graph 2.2.18: Other fixed assets of State-owned enterprises/ State-controlled enterprises and foreign-owned companies relative to domestic private owned companies (as % of total assets ), 2004-2013 average 
 Source: Orbis database and Commission services calculations. 
State-owned enterprises/State-controlled
enterprises Corporate governance framework and privatisation in Slovenia 
Sound management and enhanced corporate
governance policies for State-owned enterprises/State-controlled enterprises
can assist in mitigating the risks of future state support on public finances. The level of state support provided to State-owned enterprises/State-controlled
enterprises in Slovenia has been considerably above the EU average in recent
years. State-owned enterprises have commenced the deleveraging of non-core
assets accumulated during the boom, which will weigh on their profitability in
the coming years. In parallel to addressing these legacy issues, the focus
should shift to enhancing the core business of State-owned enterprises and
identifying sectors where state involvement is not necessary. Slovenia could
further benefit from the strong momentum and return of confidence after the
restructuring of the banking sector in 2013 and 2014 in order to accelerate the
privatisation process.          
A new corporate governance code for State-owned
enterprises was adopted in December. The new
framework is reportedly in line with the basic recommendations of 
international practice it (i) ensures that State-owned enterprises and private
companies operate on an equal footing (ii) enhances the separation of the
functions of the state from its capacity as an owner (iii) applies across the
spectrum of State-owned enterprises (with limited exceptions) under the
"comply or explain" principle (iv) reinstates the roles of the
company corpora, in particular the supervisory board, and the company's
position towards the different stakeholders (v) realises the principles of
transparency and touches upon a number of long-awaited issues such as the
remuneration and bonuses of the company boards. Contrary to its predecessor,
the new code does not exclude the parallel application of other corporate
governance frameworks (e.g. that one of listed companies), thus eliminating the
cases of privileged or otherwise differentiated treatment of State-owned
enterprises in comparison with privately held companies. Finally, corporate
governance of State-owned enterprises is explicitly connected to the goals of
the forthcoming strategy on state assets, which will ensure a consistent
treatment of State-owned enterprises.
 Graph 2.2.19: Capital expenditure relative to operating profit (EBITDA) of State-owned enterprises/ State-controlled enterprises and all Non-financial companies 
 Source: The Agency of the Republic of Slovenia for Public Legal Records and Related Services (AJPES), Ministry of Finance database, Chamber of Commerce of Slovenia calculations. 
The Slovenian Sovereign Holding, in
charge of the management and divestment of state assets is fully operational
but its asset management strategy is still to be approved. In June 2014, the ex-Slovenska odškodninska družba, d.d.
("SOD") fund was transformed into SSH following the amendment of its
articles of association, in accordance with the new law adopted in late March
2014. ([42]) In order to
perform its mandate, Slovenian Sovereign Holding requires a strategy reflecting
the country's objectives and specifying the classification of state assets in
strategic, important and portfolio  investments. The deadline laid down in the
law for the government to table its proposal in the parliament for that
strategy and for a new supervisory board for Slovenian Sovereign Holding (July
2014) has passed. A plan for a new privatisation cycle, expected by November
2014 is also missing in the absence of the strategy. A draft asset management
strategy entered intergovernmental consultations in January 2015 and is
expected to be approved by the Parliament in March 2015. Within one month after
the adoption of the strategy SSH will set up the annual asset management plan,
which will include the new divestment schedule for additional state assets. A
new supervisory board is expected to be appointed by the Parliament in the
coming months after the Ministry of Finance completes the evaluation of the
candidates in February 2015. A number of measures have been taken to make SSH
operational, such as the adoption of an asset management policy in December
2014 ([43]). The
operational aspects regarding the establishment of the SSH, e.g. required
corporate transactions and legal transformations provided for in the law, are
also on track ([44]).
Slovenia could further benefit from the
strong momentum and return of confidence after the restructuring of the banking
sector in order to accelerate the privatisation process. The privatization programme is making progress, albeit with delays.
A list of fifteen companies was compiled in 2013 for a first cycle of expedited
privatization, ([45]) out of
which three companies have been divested through privatisation and one company
has been acquired by its creditors through a debt-to-equity swap executed as
part of the restructuring process. Amongst the companies that were privatised,
the sale of the airport, Aerodrom Ljubljana, was the largest transaction and
was completed in October 2014. The sale process for the biggest assets on the
list, Telekom Slovenije (the largest telecom and the sole owner of the
telecommunication   network in Slovenia) and NKBM (the second largest bank,
owning 11% of total banking assets) is on-going, albeit with some delays, and
is expected to be signed in April and March 2015 respectively. 
The asset management plan could enhance
the transparency and credibility of the privatisation process. As Slovenia prepares a new cycle of privatisations it is important
that the list of companies is consistent with the SSH's priorities and
strategy. The privatisation of selected State-owned enterprises/State-controlled
enterprises in a transparent manner can assist in attracting FDI, and improve
the economic outlook for the Slovenian economy. Furthermore, any proceeds from
the process can assist in reducing public sector debt and enhancing the
sustainability of debt going forward. 
Price and cost competitiveness
Since 2013, Slovenia has been performing
relatively well on external markets, reflecting recent competitiveness gains. While certain losses in external price and cost competitiveness
have occurred due to wage increases between 2008 and 2010, the most recent data
and a new sectoral Real Effective Exchange Rate database show relatively
positive competitiveness developments, mainly owing to Real Effective Exchange
Rate depreciation in the tradable sectors.
The moderation in prices and costs after
2012 has contributed to the improvement of Slovenia's export performance. The traditional indicator of price and cost competitiveness at the
macroeconomic level, Real Effective Exchange Rate deflated by Unit Labour Costs
in total economy, shows a steady retreat from the significant appreciation
between 2007 and 2010 (Graph 3.3.1 – lhs). The appreciation suggested a
substantial loss in cost competitiveness, which may have been partly reflected
in the loss of market shares in 2009-2012. The subsequent Real Effective
Exchange Rate depreciation could partially explain the improvement in
Slovenia's export performance since 2013, as competitiveness shifts tend to
affect trade performance with a lag. 
Rapid aggregate wage growth coupled with
stagnating productivity and labour hoarding had previously contributed to
generating imbalances. While part of the Real
Effective Exchange Rate appreciation was due to rapid wage growth, the surge in
the trend in 2009 was largely caused by an unexpected decrease of production
and a resulting decline in productivity per employee. Collapsing economic
activity combined with labour hoarding as workers were kept on the job through
work support schemes weighed severely on firms' profitability, mainly in the
non‑tradable sectors. The tradable sectors adjusted quickly so as to
safeguard their competitiveness. For example, Real Effective Exchange Rate
based on the unit labour costs in the manufacturing sector remained broadly stable
over the last 15 years (Graph– 3.3.1 rhs). 
A measure of competitiveness based on
sectoral unit labour costs provides a more granular representation of
competitiveness developments. It shows that
Slovenia made considerable gains in price and cost competitiveness in the
pre-crisis period but confirms deterioration in competitiveness in the run-up
to the crisis that is now reversing (Graph 2.3.2). This new Real Effective Exchange
Rate indicator aggregates competitiveness at sectoral level to obtain an
economy-wide measure of competitiveness, which captures heterogeneous dynamics
among sectors. It controls for the main limitation of the traditional Real
Effective Exchange Rate, which confounds changes in the sectorial structure
with changes in the unit labour costs per sector and does not account for the
influence of global technological developments on different sectors.
 Graph 2.3.1:   Reel effective exchange rate deflated by ULCE and ULCM 
 Index 2000 = 100 Source: European Commission. 
 Graph 2.3.2:   Real Effective Exchange Rate (Unit Labour Costs in total economy) and new sectoral Real Effective Exchange Rate in Slovenia 
 Index 2000 = 100 Source: European Commission. 
Slovenia's cost competitiveness
evolution has been more favourable than that of most of its peers (Graph 3.3.3). While this new indicator ([46]) is available only until 2011, it is expected to have improved
further beyond this horizon due to favourable productivity developments and a
very limited wage growth since 2011. In addition, Bank of Slovenia ([47]) estimated an equilibrium competitiveness indicator based on unit
labour costs for Slovenia vis-à-vis EA-12 and compared it with those of its
main trading partners. According to this indicator based on unit labour costs,
price and cost competitiveness has substantially improved since 2010. A recent
extension of this analysis confirms that the competitive position of Slovenia
returned to equilibrium in 2014. 
The Nominal Unit Labour Cost index is
once again approaching the euro area average (Graph
2.3.4). This follows a period of decoupling
due to the acceleration in wage growth at the time of no additional
productivity gains. The three years (2008-2010) with flat hourly productivity
and still growing wages adversely impacted Slovenia's price and cost
competitiveness vis-à-vis the Euro Area. Nevertheless, Slovenia's Nominal Unit
Labour Costs still grew slower than those of most of its peers.
 Graph 2.3.3:   Sectoral Real Effective Exchange Rate aggregate in SI and V4 
 Index 2000=100 Source: European Commission. 
 Graph 2.3.4:   Nominal Unit Labour Cost 
 Index 2002 = 100 Source: Eurostat. 
While Nominal Unit Labour Costs in the
tradable sectors adjusted quickly and safeguarded their competitiveness, the
adjustment in the non-tradable sectors started later and is taking more time. Non-tradable sectors (real estate activities, construction, public
administration, defence, education and health, and scientific, administrative
and support services) were the main contributors to the increase in the Nominal
Unit Labour Cost but they have very little impact on the external
competitiveness of the Slovenian economy. The tradable sectors saw a more
favourable evolution, also compared to the peers and the Euro Area. Increases
in productivity and wages in the tradable sector (until 2007) inevitably
translated into increases in wages in the non-tradable and less productive
sectors; this fuelled inflation and led to an accelerating Nominal Unit Labour
Cost. Such an evolution in Nominal Unit Labour Costs is part of the convergence
process and is in line with the Balassa-Samuelson effect (Graph 2.3.5).  The protracted correction of unit
labour costs in the non-tradable and protected sectors could pose certain risks
that their higher costs pass through into the tradable ones and affect their
external competitiveness. These risks are present in particular during boom periods.

 Graph 2.3.5:   Slovenian Nominal Unit Labour Cost in tradable and non-tradable sectors 
 Tradable sectors ISIC A, C, G-I, J. Index 2000=100 Source: Eurostat, European Commission. 
Slovenia's labour productivity continues
to grow faster than the EU average (Graph 2.3.6). Productivity gains were achieved
mainly in the tradable sectors. By composition, they are positively reflected
in the recent ULC trends. Productivity measured in terms of GDP per hour
worked improved continuously over the last decade with the exception of
stagnation around the crisis years. Although productivity per person employed
dropped in 2009 as production contracted during the crisis, growth of
productivity per hour worked remained broadly in line with its Visegrád 4 peers
both before and after the crisis and consistently considerably better than the
EU or EA averages. Labour productivity per hour worked provides a better
picture of productivity developments in the economy, as it eliminates
differences in the full time/part time composition of the workforce across
countries and years (it eliminates the impact of the large use of short-time
work support schemes during the crisis in Slovenia, whereby headcounts were
maintained but hours worked decreased).
 Graph 2.3.6:   Productivity per hour worked 
 Index 2000=100 Source: Eurostat. 
Recent wage growth has been moderate and
supportive of competitiveness (Graph 2.3.7). Even though wage growth
significantly outpaced the EU and Euro Area average between 2000 and 2008, it
remained broadly in line with productivity developments and the need for
convergence. The main notable exceptions are the high increases in 2008,
partially attributable to the payment of wage disparities in the public sector
and the indexation of wages to relatively high inflation in the previous year;
and in 2010, resulting from a large increase in the minimum wage. 
The level of the minimum wage remains
comparatively high. The level of the minimum wage
in relation to average gross monthly earnings remains the highest in the EU.
This is partly due to the design of the minimum wage-setting system, which
includes various allowances (e.g. for night work, overtime) and a global
indexation encompassing all of these components and not just basic pay. In
addition, since 2008 the minimum wage increased by 33% while the gross wages
per employee by 9%. The short distance of the minimum wage from the average
wage is also related to the low level of wage dispersion in the country ([48]).In 2014 the minimum gross wage was EUR 789.15, having grown by
0.7% from the previous year, while the ratio of the minimum wage to average
gross monthly earnings was 51.4%, the highest in the EU. This is also reflected
in high relative labour costs for minimum wage workers that may relate to the
low employment level of the least skilled workers (see section 4.2) ([49]). In January 2015, the minimum wage was increased by 0.2%. Going
forward, in the current low inflation environment, the ratio between the
minimum and the average wage is expected to decrease.
 Graph 2.3.7:   Nominal compensation per employee 
 Source: AMECO. 
There have been some changes in the
wage-setting system, yet excluding the minimum wage. The new government signed the Social Agreement in January 2015 with
the social partners; which will be valid for the period 2015-2016. The
agreement establishes collective agreements as the basis for private sector
wage setting, while inflation and a share of sectoral productivity will be
taken into account in bipartite wage negotiations. The Social Agreement also indicates
that public sector wage growth has to lag behind private sector wage growth. 
It does however not contain any change to the setting of the minimum wage. A
contribution to the continuity of wage moderation comes from further reductions
in the public wage bill, which was adopted in December 2014 following an
agreement between the government and trade unions. The agreement extends to
2015 the savings measures adopted in 2012 and 2013, and also introduces
additional measures. In 2013, the total paybill in the public sector decreased
by 4.1% as compared to 2012 and the number of people employed in the public
sector by 1.5%. According to the first estimates of the government, an
additional EUR 36 million EUR of savings, including reduced performance bonuses,
could be achieved in 2015 with respect to 2014.
Non-cost competitiveness
Price and cost competitiveness can only
partially explain export performance. There is evidence that non-price factors
are very important, particularly in countries that have been through a real
convergence process. These factors include product
and geographical specialisation, developments in quality of products, notably
through research and innovation process, consumer preferences in the importing
countries, as well as the ease of doing business (efficiency of public
administration, taxation policies, regulation, capital and labour market
conditions, access to finance and investment etc.)
Trade developments in Slovenia have been
largely driven by its geographical and product specialisation (Graph 2.3.7). Slovenia's exporters benefited from
a favourable geographical specialisation before 2008, as they were oriented
towards at-the-time dynamic markets (mainly Euro Area and Balkans). They also
managed to gain significant market shares in new products. Nevertheless, with
the onset of the crisis, Slovenia lacked the necessary dynamism to enter new
markets and lost market shares. Since 2013, Slovenia managed once again to gain
market shares as well as benefit slightly from the geographical specialisation.
Overall product specialisation has been slightly negative or neutral. 
 Graph 2.3.8:   Geographical and sectoral composition of nominal rate of change of goods exports 
 Source: European Commission. 
The composition of Slovenia's exports
has improved in the last decade. The share of
high-technology products in Slovenia's exports has progressively increased
(Graph 2.3.9). This is pointing to the fact that
Slovene exports were able to compete in the segment of higher value added
products as the quality of exports has been improving over time.
Increase in the technological content and
quality of exports contributed to the boost in export performance. The quality of exports has been improving, relative to other
trading partners. Slovenia's quality index (Graph 2.3.10) estimates how Slovene exports
compete on the EU market relative to the exports of other Member States. The EU
market captures more than 75% of Slovenian exports, thus it is important to
benchmark how well these products are accepted compared to the exports from
other Member States. The quality index of Slovenia has been improving since
2006. However it remained below the physical unit labour cost (the share of unit
labour cost required to produce the value of exports) until 2012. A discrepancy
between the physical unit labour cost and the quality index appeared in 2010,
when the minimum wage increased substantially. Since then the physical unit
labour cost moderated and adjusted to the quality of exports. 
 Graph 2.3.9:   Density distributions of exports (goods) by quality 
 Source: COMEXT, Orbis, European Commission. 
 Graph 2.3.10: Non-cost competitiveness vis-à-vis EU28 
 Source: European Commission, Joint Research Centre, IPTS institute, based on COMEXT data. 
Non-cost competitiveness could improve
further through productive investment into innovative technologies and
products. The forthcoming Smart Specialisation
Strategy (Section 4.3) could serve as a platform for channelling the EU funds
into further improvement of non-cost competitiveness.  Also, current business
environment needs to adjust in order to support competitiveness improvements.
Major weaknesses stem from the developments in the financial sector, the slow
privatisation process, lengthy administrative procedures and the risk of
corruption (Section 4.3 and 4.5).
Investment dynamics
Private investment decreased
dramatically in 2009/2010 and since then, it has not recovered (Graph 2.3.11). This is not only due to the crisis,
but also because of the highly indebted corporate sector, significant state
involvement in the economy, and an unsupportive business environment.
Companies, struggling to repay their debts, have been underinvesting compared
to the historical average and peers in the region. Weakness in investment
warrants special attention not only because of to the impact on domestic demand
and short-term economic outlook but also because shortfalls in investment are
detrimental for the future potential growth of the Slovenian economy.
 Graph 2.3.11: Investment in the private sector 
 Source: Ameco. 
The magnitude of the drop in investment
is not in line with the development observed in aggregate demand. While domestic and external demand fell considerably during the
crisis, neither private consumption nor exports decreased as much as investment
(Graph 2.3.12). Despite rising unemployment and
wage restraint in the post-crisis years, private consumption modestly increased
in nominal terms and is projected to grow in the short term. Exports contracted
in 2009 but grew thereafter, yet did not lead to a significant pick-up in
investment of the exporting companies. Private investment remains 40% below its
pre-crisis peak ([50]) and is
projected to increase only marginally by 2016. This creates substantial
macroeconomic costs. Through its direct impact on aggregate demand, lack of
investment translates into reduced GDP growth. In addition, such development
considerably reduces Slovenia's ability to grow in the medium and long term.
 Graph 2.3.12: Private investment and private consumption 
 Source: Ameco. 
Low investment eroded Slovenia's
potential growth. The Commission's estimates for
the Euro Area indicate that a 5 percentage point reduction in the investment
rate leads to a reduction in potential growth of nearly 0.5%. Slovenia's
potential output has substantially dropped since 2009 (Graph 2.3.13). The Commission's estimates
potential growth in 2014 at ½%, compared to 3-4% between 2000 and 2008. This is
primarily due to a large reduction in the contribution from capital
accumulation, and secondarily due to lower total factor productivity. While
Slovenia's potential growth is projected to progressively recover, it is
expected to remain at a relatively low level over the medium term, restrained
by protracted low capital accumulation as well as only slowly recovering total
factor productivity. Total factor productivity growth is an essential driver of
long-term growth, capturing efficiency gains in the overall use of economic
resources and reflecting technological progress reflected in capital. In 2014,
the total factor productivity contribution was estimated approximately 70%
lower than the 2000-2008 average. As ageing population is expected to have
negative impact on potential growth, an increase in capital accumulation and
productivity growth is crucial in order to return to a higher long-term growth
path. 
 Graph 2.3.13: Potential output and components 
 Source: European Commission. 
The crisis turned corporations from net
borrowers to net lenders, reflecting the deleveraging needs of corporates. Prior to the crisis, non-financial corporations relied on foreign
credit to finance their investment. Graph 2.3.14 shows a steady net borrowing level
until 2003, and then a considerable accumulation of debt. The necessary
adjustment took place afterwards, but as of 2012 investment rate fell below
savings rate, making Slovenian companies net savers. This reflects the ongoing
deleveraging (Section 2) and is mirrored in the growing current-account surplus
(Graph 2.4).
 Graph 2.3.14: Non-Financial Corporations savings and investment 
 Source: Eurostat, ESA 2010; * 2014 based on quarterly data. 
Construction investment accounted for
most of the decline in gross fixed capital formation but productive investment
was also affected (Graph 2.3.15). Slovenia experienced a
non-residential construction investment boom, mostly in infrastructure, retail,
and tourism structures, which ended abruptly in 2009. While the construction
sector appears overinflated before the crisis, its post-crisis activity and
investment has been extremely low. Peak-to-through decline in employment in
this sector was 30% (2009-2014) and is stabilising only now. Peak-to-trough
decline in construction investment was close to 50% (2008-2012). Productive
investment in machinery and equipment shrank by a third between 2008 and 2010,
but grew again in 2011 and 2013. 
 Graph 2.3.15: GFCF by type 
 Source: Eurostat. 
Both households and non-financial
corporations reduced their investment significantly at the onset of the crisis,
while public investment was reduced at a later stage due to fiscal
consolidation (Graph 2.3.16). Non-financial corporations and
households sharply reduced their investment in terms of GDP by almost 40%
between 2008 and 2009. Government expenditure on investment continued to grow
until 2009, but as the recession took hold and revenue shortfalls materialised
public investment was targeted as a key measure of the required fiscal
consolidation.  Public investment declined by 22% between 2009 and 2012 and
this contraction dampened the tentative export-led recovery experienced by
Slovenia in 2010-11. Since 2012, there has been a significant increase in
public investment largely due to EU co-financed projects and the 2015
deadline for the drawdown of funds from the EU 2007-2013 multiannual
financial framework. Consequently, public investment amounted to over 5% of GDP
in 2014, one of the highest levels in the EU. Strong public investment has been
one of the key drivers of the economic recovery experienced in Slovenia in 2014
and it is expected to continue to grow in 2015, albeit at a more modest pace.
 Graph 2.3.16: Investment by institutional sectors 
 Source: Eurostat 
High level of corporate indebtedness,
the need to deleverage, regulatory bottlenecks and persisting uncertainty
appear to have been the main drivers of underinvestment. Underinvestment in the private sector has been aggravated by the
lack of equity among corporates. Inefficient capital structures make it
difficult for companies to access bank funding to finance productive investment
and at the same time erode the banks' long term profitability, as outlined in
the Sections 2 and 3.1. Interest rates have decreased since the crisis peak but
still remain high for corporates, especially small and medium enterprises.
Uncertainty ([51]) also
appears to have been a major factor driving the sharp contraction in
investment. However, the financial markets pressures have subsided and spreads
have returned to relatively low levels, thus economic uncertainty is expected
to weigh less on investment going forward.
The Commission's services estimations
show a strong negative correlation between the accumulation of debt by
non-financial corporations in the pre-crisis years and the change in
non-residential investment since the crisis (Graph 2.3.17). In this graph, Slovenia is an
outlier, which could mean that the large decline in investment in Slovenia goes
beyond the increase in indebtedness. This may be partly explained by Graph 2.9,
which reflects the inability of Slovenian firms to increase savings via
profits, partly due to the wage dynamics and labour hoarding. In addition, as
outlined in the scene setter (Section 2), the change in the share of the debt
of non-financial corporations in GDP is less concerning than the sharp increase
in the debt-to-equity ratio. This reflects the unsustainable pre-crisis
growth-financing model, which was concentrated almost exclusively on debt. This
underscores the importance of attracting fresh equity, in particular through
alternative equity sources (venture capital) and foreign direct investment.
 Graph 2.3.17: Non-residential investment and non-financial company debt 
 Source: European Commission. 
Improving business environment and
attracting foreign direct investment is key.
Slovenia suffers from underinvestment in the private sector and difficulties of
companies to access bank funding to finance productive investment, coupled with
the limited availability of public investment (apart from EU co-financed
investments). This underscores the need for an improved business environment
and enhanced competitiveness in order to attract private investment. Ongoing
corporate sector deleveraging, lack of excess savings and the tight credit
conditions constrain domestic investment and underscore the need to promote
Foreign Direct Investment. FDI would bring positive spill-over effects to the
rest of the economy in terms of labour and capital productivity. 
The role of FDI
FDI plays an important role as a
long-term, stable source of financing for the Slovenian economy. At the end of 2013, the stock of inward FDI in Slovenia stood at
EUR 8.9 billion (24.7% of GDP), which is 3.5% lower than in 2012 (1 pp. lower
in terms of GDP). The rapid increase in the pre-crisis period and relatively
stable post-crisis stock show that Slovenia managed in the past to attract FDI,
albeit starting from a relatively low level, and that FDI is a reasonably
stable mode of financing even in crisis times (Graph 2.3.18), in contrast to portfolio and other
investment.
 Graph 2.3.18: Inward FDI 
 Source: Bank of Slovenia. 
FDI inflows declined in 2012-2013 but
considerable increase in FDI inflows is estimated for 2014. In contrast to the pre-crisis period, Slovenia has registered
outflows of non-equity capital and reinvestment as
companies preferred to pay out dividends rather than reinvest profits (Graph 2.3.19). Equity was also affected due to the
exit of foreign owners from financial corporations. While slower FDI-inflows
are to some extent rational due to a deceleration in global activity and FDI
flows, Slovenia has been more affected than its peers (Graph 2.3.20). However, preliminary data for 2014
shows positive flows in equity and debt instruments, and an increase in FDI
stock by approximately 15% in the first 9 months of the year. 
 Graph 2.3.19: FDI inflows 
 Source: Bank of Slovenia. 
 Graph 2.3.20: FDI inflows in Slovenia, Visegrád 4, EU 
 Source: Unctadstat. 
FDI stock remains concentrated in the
tradable sectors and the overcapacity in the non-tradable sector is being
reduced. The largest share of the FDI stock in Slovenia
is present in industry (38% in 2013), followed by wholesale and retail trade
(21%). Another important FDI-attractive sector consists of financial and
insurance activities (19%). Graph 2.3.21 details the distribution of FDI among
sectors in 2013 and graph 2.3.23 the evolution in tradable and
non-tradable sectors. In the pre-crisis period, an important part of FDI was
directed into the non-tradable sector and left some over-capacity after the
bust, which has taken time to correct. Given that Slovenia was in recession in
2009 and again in 2012-2013, FDI growth remains sluggish compared to the
pre-crisis period.
 Graph 2.3.21: FDI stock per sector in Slovenia, 2013 
 (1) A - Agriculture, forestry and fishing, B-E - Industry (except construction), G-I - Wholesale and retail trade, transport, accommodation and food services, J - Information and communication, F - Construction, K - Finance and insurance, L - Real estate, M-N - Professional, scientific and technical; administrative and support service, O-Q - Public administration, defence, education, human health and social work, R-U - Arts, entertainment, recreation and other Source: Bank of Slovenia. 
 Graph 2.3.22: Sectoral composition of greenfield FDI in Slovenia, 2011-2013 
 Source: Financial Times' FDI markets dataset. 
In terms of greenfield investment ([52]), the manufacturing sector represents almost 50% of total capital
expenditure. This includes mainly transport
equipment and knowledge intensive sectors. The coal, oil and natural sector and
specifically the subsector of gasoline stations emerged as the first-largest
job creator with FDI (Graph 2.3.22).
 Graph 2.3.23: FDI stock in tradable and non-tradable sectors 
 Source: Bank of Slovenia. 
Most of the inward FDI originates from
European neighbouring countries. One third of the
FDI stock comes from Austria, who is the main foreign investor in Slovenia. It
is followed by Switzerland (12%), Italy (9%), Germany (8%), France (7%) and
Croatia (6%), by 2013 data (Graph 2.3.24). 
In terms of stocks of FDI, Slovenia lags
severely behind other countries. According to the
Unctad data ([53]) the level
of FDI in Slovenia was markedly lower than the EU average of 49.5% of GDP
(Graph 2.3.25). Moreover, Slovenia's peers
registered above-average FDI stocks built up during 1990s' privatisations and
more recently due to active policies to attract FDI, such as improving the
business environment and investment incentives.
 Graph 2.3.24: Origin of inward FDI, stocks in 2013 
 Source: Bank of Slovenia. 
 Graph 2.3.25: FDI stocks in Slovenia, Visegrád 4, and the EU 
 Source: Unctadstat. 
Weak FDI flows are linked to the quality
of the business environment, whose attractiveness relative to other countries
continues to deteriorate. High regulatory cost,
limited access to finance, and high taxes and costs on skilled labour force
(see Section 4.2) are the three major weaknesses. These characteristics coupled
with other issues in the institutional environment including corruption (see
Section 4.3) deter potential investors. The situation is aggravated by the lack
of an industrial or investment policy. The European Commission's 2014
Industrial Competitiveness report ([54]) concludes that little has been done to address these weaknesses,
making Slovenia less attractive for foreign direct investment, especially when
compared to other countries in the region. The latter have been more active not
only in facilitating investment through a more business-friendly environment
but also in promoting it through effective investment incentive policies.
The untapped stock of potential FDI
limits Slovenia's investment-financing possibilities. Ongoing privatisation and corporate restructuring in Slovenia offer
new opportunities for attracting FDI into the country, yet the business culture
needs to adapt to take full advantage of foreign investments. At a time when
domestic financing is scarce, and public investment dependent on capital
transfers, FDI could help to fill the gap. Facilitating and actively
encouraging foreign investors to acquire partial or full control of a business,
or entering Slovenia via greenfield investment, would create stable and lasting
economic links to the country, and acquire technological and management skills
from abroad. 
There is room for improvement in
Slovenia's efficiency in attracting FDI. In 2013,
the Court of Audit conducted an analysis of the efficiency of supportive
measures for FDI and presented its opinion that the actions of the authorities
were not conducive towards attracting FDI.  The audit concluded that the
Ministries did not focus on the implementation of the measures that would have
had the greatest impact on the attractiveness of Slovenia for FDI.  
The unsatisfactory trend in the inflow
of FDI could be reverted through targeted measures.
While the country implements an ambitious privatisation plan essential to
attract fresh capital into the country, more has to be done on eliminating
bottlenecks and unnecessary regulatory burdens and increase greenfield
investment. The Single document (see Section 4.3) identifies areas where
important interventions are needed to reignite investment in Slovenia.
The forthcoming FDI strategy would
benefit from a coherent set of both FDI facilitation and FDI promotion
measures. This includes inter alia the creation of
a one-stop-shop for foreign investors, the development of a coherent set of
promotional activities, a set of specific industrial and tax incentives linked
to existing and future policies and strategies like the 2013 Industrial policy,
the 2011 Research and Innovation Strategy, and the forthcoming Smart
Specialisation strategy.  The creation and support of national value chains and
upgrading of absorption capacities of domestic firms can boost local employment
and thus help to increase public acceptance towards foreign investment.
Moreover the size and fundamentals of its economy as well as its location make
Slovenia the ideal location for global value chains. Equally important is the
development of a communication strategy on the expected benefits of FDI for growth
in the country and on the comparative advantages of Slovenia as an FDI
destination due to its geographic location, natural resources or abundance of
skilled labour force. The forthcoming strategy on FDI should support and
complement future investment projects including those submitted in the context
of the new EU Investment plan ([55]). 
Concentrating efforts on additional
supportive and easily attainable policies would quickly pay off. While privatisations coupled with effective communication policies
can potentially have positive long term impacts, other policies targeted on
reducing regulatory burdens should be considered. Streamlining processes in the
area of spatial planning and registering property, constitute easy wins because
of the shorter implementation periods and the relatively low associated costs.
It is important to maintain the reform momentum and not compromise on the
ambition of these plans in order to boost Slovenia’s attractiveness as a
location for FDI and reach the authorities' ambitious FDI target for
2017 ([56]).
The fiscal situation in Slovenia in recent
years has been challenging; a prolonged recession coupled with significant bank
recapitalisations has resulted in a sharp rise in public debt. Furthermore,
successive years of consolidation have dampened consumption and weighed on the
domestic economy. As the recovery gathers pace, the focus turns to the
introduction of a well-designed fiscal framework, which can assist in
safeguarding debt sustainability. The focus of budgetary execution should shift
from temporary consolidation measures and linear cuts to expenditure reviews,
which provide a more sustainable approach to public expenditure planning and
can generate considerable efficiency savings. 
Taxation
Slovenia tax revenue-to-GDP rate is
below the EU average but the second highest ([57]) of new member states. At 37.1% of GDP
in 2014, it is below the EU average of 39.1% of GDP. The tax structure in
Slovenia is considered more growth friendly than the EU average with a higher
share of indirect taxes and a lower share of direct taxes as a proportion of
total revenues. Revenues from direct taxes were considerably lower than the EU
average in 2013 (7.2% vs. 12.8% of GDP EU average). 
Slovenia plans to undertake a
comprehensive review of the tax system in order to
restructure the tax burden, shifting tax away from labour taxes and abolish
inefficient tax allowances. The review is expected
to commence in the second half of 2015. While the tax wedge for different family types and
wages is at or below the EU average, the social contributions paid by employees
are much higher (15% of GDP in 2013 compared to the EU average of 13.5%).  This is mainly because there is no cap on
social contributions for employees. However, when all elements of taxation are
considered the tax wedge on
labour for the average-wage single earner (42.3% in 2013) is lower than the EU
average (44.8%). 
Recurrent taxation of immovable property
is considerably below the EU average with revenues
amounting to 0.5% of GDP in 2012 vs. an EU average of 1.5%. This indicates
scope for the introduction of further measures in this area. The authorities
are currently considering introducing a revised version of the real estate tax
that was previously repealed. ([58]) The tax burden of a revised real estate
tax if introduced would remain at the same level as under the existing system
of property taxation, although minor increases in tax revenues are expected due
to the broadening of the tax base. Given that the level
of property taxes in Slovenia is considerably below the EU average there
appears to be scope to revise the rates.
The administrative process with respect
to tax compliance in Slovenia takes considerably longer than the EU average. According to the PwC
and World Bank (2014), Paying Taxes 2015:  The global picture report ([59]) the total
time spent to file and pay taxes for a sample mid-sized company in Slovenia
(260 hours) is significantly higher than the EU average (179 hours). The key
issues for businesses is the uncertainty regarding the length of procedures,
particularly with respect to appeals and the uncertainty frequent legislative
changes create (Section 4.3). The authorities have indicated that there has
been a reduction in the number of appeals pending in the last two years but the
time for a decision in the more complex areas (i.e. VAT and corporate tax) is
longer than the targeted duration.  The government is
addressing this issue, among others via the single document, which
includes measures to simplify tax procedures (Section 4.3). 
Measures to tackle the grey economy have
yielded initial positive results. The government strengthened the programme to mitigate the impact of
the grey economy, including the introduction of stricter provisions regarding
the use of cash register software and strengthened presence of field
inspectors. The authorities estimate the full year yield of these measures
equates to 0.3% of GDP and an increase in voluntary compliance of approximately
20%. The Prevention of Undeclared Work and Employment Act entered into force in
January 2015 introduced a voucher system for personal supplementary work, which
is expected to further reduce the grey economy. There are plans to upgrade the
existing system of tax registers by the end of 2015 subject to the impact
assessment, finding an upgrade represents value for money.
Debt sustainability
Slovenia's debt has risen sharply in
recent years from 22% of GDP in 2008 and is expected to stand at 83% of GDP in
2015. While exceptional items, particularly bank
recapitalisations, have significantly contributed to this increase, sustained
primary deficits over the period have also attributed. Furthermore, the level
of contingent liabilities in Slovenia is high (government guarantees equate to
18% of GDP), largely to state-owned entities (Section 3.2). This large stock of
guarantees poses an additional risk to public debt sustainability and
intrinsically links the sovereign to the performance of these entities. 
Slovenia's debt is expected to continue
to increase to 87% of GDP in the medium term based on a no-policy-change
assumption ([60]). Under the baseline scenario of the Debt Sustainability Analysis
public debt is expected to steadily increase, as a percentage of GDP, in the
medium term (i.e. until 2025) (Graph 3.1.1). Under a scenario ([61]) where the structural primary balance is assumed to converge to a
historical average, and another scenario ([62]) where all main macroeconomic variables converge to a historical
average, debt levels accelerate quickly on an unsustainable trajectory from
2017 onwards. If however Slovenia was to fulfil its commitments (Graph 3.1.2) under the Excessive Deficit Procedure
and then abides by the rules of the Stability and Growth,   converging to
Slovenia's current medium-term objective by 2017 and maintaining it thereafter,
we would see an acceleration in the reduction of debt towards 60% of GDP. The
reduction would be even faster if Slovenia were to adopt the fiscal commitments
outlined in its own Stability and Convergence Programme. ([63]) This underscores that maintaining fiscal discipline is a
prerequisite to debt sustainability.
 Graph 3.1.1:   Gross debt % of GDP - DSA analysis 
 Source: European Commission calculations. 
 Graph 3.1.2:   Gross debt % of GDP - institutional scenario 
 Source: European Commission calculations. 
Fiscal framework
Slovenia is one of only a few countries
where the adoption of the legislation transposing the directive on budgetary
frameworks into the national legal order has been delayed and is still
on-going. According to the Slovenian Constitution,
as amended in May 2013, the legislation implementing the general government
budget balance/surplus rule (in structural terms) should have been adopted by
end November 2013. However, the draft Fiscal Rules Act, implementing the
constitutional amendment was only adopted by the Government and submitted to
the Parliament in December 2014.
The intention is for a new fiscal
framework to be in place for the 2016 budgetary process. The draft Fiscal Rules Act passed first reading in the Parliament
and is expected to be enacted in March 2015. The draft Act indicates the
minimum value of the medium-term fiscal objective as determined by the Treaty
and sets out the correction mechanism, which will be triggered in the event of
significant observed deviations from the medium-term objective or the
adjustment path towards it. The legislation will be complemented by revisions
to the Public Finance Act, which will include detailed provisions defining the
drafting, implementation and monitoring of the budget of all general government
institutional units. The Fiscal Council, as envisaged in the draft Fiscal Rules
Act, will be an independent body charged with monitoring fiscal policy and
budgetary execution and assessing compliance with the fiscal rules. The act
provides that the appointment of the Fiscal Council members will commence
within fifteen days of the act coming into force and the Council will establish
its rules of procedure within 3 months after its members are appointed. The
focus is now on having the rules and the Fiscal Council fully operational in
time for the 2016 budgetary process.
Pension, health and long-term care system
Risks to the sustainability of the
pension system, adequacy of pensions and the sustainability of the long-term
care systems persist in light of an ageing
population and increased demand for health and long-term care services. The
share of the population aged over 65 years has increased steadily and currently
stands at 17.1%. Projections for 2060 indicate a considerable increase to 31.6%
(Graph 3.1.3). ([64]) The demographic old age dependency ratio is projected to increase
from 25.4% in 2013 to 52.5% by 2060. ([65])
 Graph 3.1.3:   Decomposition of the population by age groups in Slovenia 
 Source: Ageing report 2015 for Slovenia. 
Pensions
Measures to underpin the sustainability
and the adequacy of the pension system in the long-term are still pending. The 2012 reform has enhanced the mid-term sustainability of
pensions by increasing and equalising the statutory retirement age for both men
and women, reducing the complexity of the system and eliminating some
anomalies, without automatically linking the statutory retirement age to life
expectancy. Initial results appear encouraging. The inflow of new pensioners
has almost halted and 80% of retired people have reached full statutory
retirement age. ([66])
Nevertheless, a slight increase of old-age pension costs coupled with a
simultaneous fall in revenues resulted in a significant increase in the amount
of budget transfers to the pension fund (from 29.2% of total pension pursue
revenue in 2012 to 32.0% in 2013). The pension system in Slovenia is facing
long-term sustainability risks given the steep increase in projected pension
expenditure. In 2014, the OECD estimated that expenditures will increase from
the current level of 11.8% of GDP to 18% of GDP in 2050 (Graph 3.1.4). Preliminary projections for the
forthcoming 2015 Ageing Report suggest lower spending needs for pensions in the
long-term, but expenditure pressures in Slovenia are still higher than the EU
average. 
 Graph 3.1.4:   Sustainability of the pension system in Slovenia 
 Source: OECD 2014: Pensions outlook. 
The 2012 reform's overall impact on
pension adequacy remains contingent on labour market developments and warrants
close monitoring. The aggregate replacement ratio
deteriorated by 1 pp. in 2013 to 46%. The average net pension dropped slightly
in 2013 both in nominal terms and relative to the average net wage. ([67])  The pension benefit ratio is projected to fall further until 2020
(from 33.8% in 2013 to 28.9% in 2020) before stabilising in the long run.
Longer contribution periods and stabilised entry pension levels could
positively affect the adequacy of pensions, if men and women are able to remain
longer in the labour market. The new indexation formula, longer reference
periods for calculating the pension base and the prolonged pensions freeze
might have a negative effect. Despite the modified calculation of the pension
assessment base introduced by the reform to prevent a further decrease in
pensions, the adequacy of pensions is still deteriorating. Coupled with the
2012 social reform, this has significant implications on the risk of poverty in
old-age, in particular for women ([68]) and people with disabilities (Section 4.2).  
A White Paper on the long-term
sustainability of pensions is due to be published in mid-2015. A new comprehensive reform is envisaged for 2016-17 and will
propose the reform of the first and second pillars with the objective of
addressing the sustainability of the pension system in the long term (post
2030) and adequacy of pensions. A working group has been established to prepare
several proposals for a pension reform (including notional defined
contributions and a points system, that is, the current system with adapted
parameters). The existing micro-simulation model will be upgraded in order to
test various proposals. The 2012 reform envisaged the establishment of a
Demographic Fund. The legal act establishing this Fund is expected to be
adopted by June 2015. 
Healthcare system
The ageing of the Slovene population
also poses challenges to the sustainability of public spending on health care. According to preliminary projections in the Ageing Working Group in
2015, public health expenditure (measured as a share of GDP) is projected to
increase significantly in the next decade. At 7% of GDP in 2012, the rate of
public spending on healthcare is close to the average of the EU (7.3%) and has
remained stable since 2009. ([69]) 
Health indicators for Slovenia show a
mixed picture. On the one hand, infant mortality is
the lowest in the EU; on the other hand, the gap between life expectancy and
healthy life expectancy is one of the largest in the EU for both men and women.
While only a relatively small proportion of the population report unmet health
needs, the number of patients on waiting lists increased substantially in 2014
and indicates deterioration in accessibility to medical services. According to
the data on 47 selected services, in October 2014 there were more than 77 000
patients waiting, of whom almost 15 000 exceeded the maximum waiting time as
established by the authorities. 
Slovenia is committed to achieving cost
savings in the health care sector through rationalisation of expenditures. The recently introduced therapeutic groups for drugs ([70]) and the pilot project of common public procurement are showing
positive results. The pilot project of common public procurement in the health
care sector shows that substantial savings can be realised if tenders are
handled centrally. ([71]) From 2015,
centralised public procurement will be obligatory for all 28 hospitals.
Measures to address the challenges of suboptimal provision of health services,
redefining the rights arising from compulsory health insurance, and upgrading the
payment models with respect to health care providers remain outstanding.
Further efficiencies could be gained through the introduction of interoperable
e-health solutions.  
The comprehensive review of healthcare
expenditure provides an opportunity to reallocate resources towards priorities
and generate efficiency savings. The review will be
undertaken in cooperation with the World Health Organisation and the European
Observatory on Health Systems and Policies. A draft scope for the review has
been prepared and a workshop was held with the relevant stakeholders in January
2015 to finalise the proposal. The project will be wider than just expenditure
and will include; (i) an analysis of the financing of the health system, (ii)
an expenditure review (iii) a review of benefit basket and (iv) an assessment
of health technology. The review will be a two prong approach – identify
measures for 2016 (i.e. "quick wins") and also long term measures
that will require more time to implement.
The pending expenditure review and the
National Healthcare Resolution will serve as a basis for a comprehensive
healthcare reform, which is expected to enter into force in January 2016. The National Healthcare Resolution Plan, expected to be adopted in
mid-2015 will include measures to improve access to health services, as well as
measures to promote efficiency in the health sector by introducing models for
provision of services and infrastructure and the monitoring and revision
system.  
A reform of health care is under
discussion. The use of existing public resources
could be improved by strengthening primary care, rationalising inpatient care
and reforming the financing of the system. The authorities are planning to
adopt the reform of the health insurance schemes by the end of 2015, in order
to take effect from January 2016.
Long-term care
Public expenditure on long-term care is
projected to more than double by 2060 due to population ageing alone. ([72]) The
consequences of the economic crisis are visible in the decreasing scope of formal
long-term care, both institutional and community-based care (e.g. formal home
help). Slovenia is characterised by prevailing institutional forms of long-term
care in the public sector. The Association of Social Institutions of Slovenia
estimated that in the first 10 months of 2013, approximately 3% of
institutional care users left care and either returned home or were taken into
the care by their relatives. The average pension is not sufficient to cover the
costs of institutional long-term care. 
At the end of 2013, the government
adopted a blueprint for long-term care but the
adoption of the legislation underpinning the reform has been postponed until
the end of 2015. The strategy is to address long-term care in the framework of
wider discussions on the sustainability of the healthcare sector, including the
reform of the health care insurance schemes in order to ensure appropriate
funding. The main objective of the reform is to regulate and establish
sustainable funding of social and health services ([73]) by introducing compulsory public insurance, creating a single
entry point and enabling users to choose the type of service (in-home or
institutional) and the service provider. Its fiscal impact still needs to be
quantified.
The labour market is showing signs of
improvement but structural challenges persist concerning long-term
unemployment, and the employment of low- skilled and older workers. Unemployment rate decreased from 10.1% in 2013 to an estimated 9.8%
in 2014. Job creation has been strong in the non-tradable service sectors,
particularly in administrative and support services such as employment
agencies. At the same time, job losses in the construction sector have slowed.
Employment gains in the tradable sectors were modest (Graph 3.2.1). 
 Graph 3.2.1:   Employment in tradable and non-tradable sector 
 Index 11/2005 = 100 Source: SORS, European Commission calculations. 
The overall unemployment rate decreased
but long-term unemployment remains high, with consequences on poverty. The long-term unemployment rate peaked at 5.7% of active population
in the first quarter of 2014 (Graph 3.2.2) but decreased thereafter. In the
third quarter of 2014, it stood at 4.9% and represented half of the total
unemployed. The number of very-long-term unemployed more than doubled in the
period 2008–2013 but recently decreased to 2.6% (Q3-2014). The low outflow rate
from long-term unemployment denotes the structural nature of certain segments
of unemployment ([74]). Although
staying below the EU average, poverty and social exclusion continued to
increase in 2013, moving Slovenia further away from the EU2020 targets.
 Graph 3.2.2:   Long term unemployment as % of active population 
 Source: Eurostat. 
Labour market participation
Labour market participation of older and
low-skilled workers remains a challenge. The
employment rate of vulnerable groups (such as older and low skilled workers) is
persistently lower than the EU average. Moreover, the employment rate in these
groups reduced substantially since 2008 due to a sharp decline in the economic
activity. The sectors that predominantly employ less skilled workers (e.g.
construction and manufacturing) were worst affected by the economic crisis.
Consequently, the employment rate of the low skilled workers fell the sharpest
(from 52% in 2008 to 37% in 2014). The employment rate of older people is the
lowest in the EU (50% in 2014) and it stagnated between 2008 and 2014. The
employment of older women has picked up and increased by almost 10 pps. between
2008 and Q3 of 2014 (Graph 3.2.3).
Slovenia has made limited progress in
developing an efficient and adequately funded system of active labour market
policies to address these challenges. Slovenia
reduced the allocated budget for the implementation of the active labour market
policy programmes in 2015, although the budget is expected to increase after
the adoption of the supplementary government budget in February 2015 and the
receipt of funds from the ESF. In addition, in the period 2014-2020, EUR 200
million will be earmarked for lifelong learning measures specifically targeting
older and low-skilled workers. It is important to adequately support the
vulnerable groups in order to address persistent structural imbalances on the
labour market as the current pattern of active labour market policy resources
risks underinvestment in the skills of the disadvantaged. ([75]) The evaluation of the active labour market policy is foreseen in
the context of the implementation of the European Social Fund, which is the
main source of funding for these measures.
 Graph 3.2.3:   Employment rate of vulnerable segments in Slovenia and the EU28 
 Source: Eurostat. 
Labour market segmentation and youth
unemployment
High segmentation is affecting
particularly the labour market entry of young people. Youth unemployment in the age group of 15-24 peaked in 2012 and has
since moderated to below the EU average. However, unemployment in the age group
25-29, has risen above the EU average and peaked at 14.6% in 2013. High
unemployment in this group could be partially explained by lower employability
of students who concluded their studies with delays and higher reliance on
occasional student work, accounting for almost 80% of the temporary jobs
occupied by young people. Slovenia registers the highest share of young people
(15-24 years) in temporary employment in the EU (73.2% in 2013). 
Labour market participation of young
people has been reinforced by Youth Guarantees.
Slovenia increased the cut-off age of qualifying for the Youth Guarantee
measures from 25 to 29 years and will invest EUR 157 million (mostly coming
from the ESF) in the period 2014-15. The first results of the national analysis
presented in Q2-2014 show that people enrolled in Youth Guarantee Schemes
received 70% more trainings, 40% more job offers and ten times more job
interviews with employers. The outreach to non-registered youth has improved
due to the cooperation with school counsellors, who were referring drop-outs
directly to the public employment services. The public employment service has
adapted its online tools to extend its outreach. 
Concrete steps were taken to address the
labour market segmentation for young people. The
Act on Occasional Student Work will increase social security for students,
while preserving the flexibility. ([76]) The act introduces minimum hourly wage and social security
contributions on student work. The non-wage costs for student work, which now
include social contributions from employers and students, will increase
substantially, however the student work will still remain one of the cheapest
forms of work. These measures will yield an additional EUR 15 million, which
will be partially used to finance scholarships. The evaluation of the reform is
due in September 2015 and additional measures will be considered only
thereafter. The outstanding measures (e.g. the official recognition of the work
experience) will also be addressed. 
The 2013 labour market reform improved
labour market segmentation and flexibility. The
reform simplified dismissal procedures and reduced dismissal costs, but
tightened the regulation of fixed-term contracts and restricted the use of
temporary agency work. The initial analysis of the impact of the reform shows
positive results. The use of open-ended work contracts increased and use of
fixed-term contracts fell. However, more recent quarterly data do not
conclusively prove the decrease of temporary contracts, as their use seems to
be closely dependant on the economic cycle (Graph 3.2.4). The measures promoting the use of
permanent contracts for hiring young people (in the framework of Youth
Guarantees) have also contributed to this result. The next full report on the
effects of the reform is to be prepared in March 2015. Particular focus will be
on the employment trends of self-employed, economically dependent persons and
in particular, to the possible abuse of these contracts that are attractive
because of low social contributions.  The labour inspectorate has stepped up
the investigation of contractual arrangements.
 Graph 3.2.4:   Cyclicality of temporary employment 
 Source: EUROSTAT. 
Slovenia has also addressed segmentation
through the equalisation of the non-wage costs of some forms of work contracts
(other than student work) while keeping their flexibility. Since the beginning of 2014 full social contributions (15.5% to be
paid by employees and 8.85% by employers) have to be paid on two other most
used types of civil contracts. On the basis of an analysis of costs of various
forms of work contracts, the government will propose measures for the
equalisation of non-wage costs in mid-2015. While this may have a positive
impact on segmentation, the impact on employment promotion may be limited as
the tax wedge for employment contracts at all level of wages and types of
families in Slovenia is close to or lower than the EU average.
Education 
Slovenia has reached the education
targets of the Europe 2020 strategy. Early school
leaving is the lowest in the EU (3.9% in 2013) and 40.1% of the population aged
30-34 has attained a tertiary qualification. The focus now needs to shift to
the quality in education. As measured by the Programme for International
Student Assessment (PISA) ([77]), the performance of 15-year olds in literacy, mathematics and
science remained unchanged between 2009 and 2012 (Graph 3.2.5). While Slovene teenagers perform
worse than the EU average in reading, they perform better in mathematics and
science.  
The higher education system presents
several inefficiencies related to the high rate of dropout and fictitious
enrolment. The dropout rate from university is
estimated at 35%. Fictitious enrolment to post-secondary vocational education
is estimated to account for more than half of first-year students . This
is mostly due to the incentives and social benefits linked to the student status
and weak administration controls. ([78]) Half of all students hold a job during their study years at the
expense of performance and prolonged duration of study. In parallel, the
quality of implementation of tertiary programmes risks being affected by the decrease
in total expenditure on education. Spending of tertiary education was reduced
by 13% between 2011 and 2012 or 5% between 2008 and 2012 (Graph 3.2.6) .
The amendments to the Higher Education
Act are expected to address the issue of fictitious enrolments. While the draft was prepared in October 2013, the change in
government delayed its adoption. The government plans to adopt the law in 2015
in order to enter into force in academic year 2017-18. The principal
objective of the act is to decouple student status from student benefits in
order to remove the incentives of fictitious enrolment. An important step in
this direction has been the introduction of a new electronic information system
has become an official source of information on student status and is used by
public institutions to grant scholarships, transport and food subsidies,
dormitories, health insurance and student work. In 2014/2015 it was also used
for electronic enrolment into higher education. The in-built controls have
already been successful at preventing some fictitious enrolment into higher
vocational education and training. By the end of 2015, the system aims to
become an analytical tool for evidence-based policy making.
 Graph 3.2.5:   % of low achievers on PISA tests in 2009 and 2012 in Slovenia 
 Source: OECD; Programme for international student assessment. 
Skills mismatch
Skills mismatches have become less
evident. Slovenia displays one of the lowest shares
of young people with tertiary education in jobs requiring low qualification
(vertical mismatch). At 66.2%, the proportion of upper secondary students
following vocational education and training remains above the EU average (50.4%
in 2012).  However, skills shortage in the long run could mostly affect
high-skilled occupations. Demand for high skilled workers is projected to
increase substantially by CEDEFOP (by 13% over the 2010-2020 period).  
 Graph 3.2.6:   Public expenditure for formal education (in million EUR) 
 Source: SORS. 
Slovenia has undertaken several actions
to address the risk of skills mismatch and numerous measures are planned until
2020. The public employment services are currently
working on a bi-annual forecast of deficit occupations in parallel to the
establishment of the National Career Point, which aims to develop the
methodology for better career orientation. Skills mismatch is planned to be
further addressed by introducing scholarships for deficit professions,
improving the link between education and the local economy. The government
intends to close the gap in skills mismatch by linking study specialisations to
the priority areas of the Smart Specialisation Strategy. In the field of
vocational education, the government plans to introduce apprenticeships via a
new law, which will primarily redefine the role of the apprentice as an
employee and clarify the role of the social partners. A coordinating body for
vocational education has been set up. Its role is to develop new projects and
to establish the strategic direction for vocational education with
stakeholders. Subsidies for apprenticeships and coordination between different
ministries will play an important role in setting up the system. Finally,
transparency of qualifications on the labour market will be enhanced with the
new Act on the Slovenian Qualifications Framework expected to be adopted in
2015.
Social issues
Poverty and social exclusion continued
to increase in 2013. This development moved
Slovenia further away from the poverty and social exclusion target. The number
of people at-risk-of-poverty or social exclusion increased and reached 410,000
in 2013, considerably above the target of 320,000. While the poverty rate
remains below the EU average, it has consistently deteriorated since 2009. The
main reasons for the continuous deterioration in material welfare are a decline
in employment and the rise in unemployment to the 1990s levels. Furthermore,
wages, pensions and social transfers declined in real terms, and the revised
regulation of social benefits implemented in January 2012 lessened somewhat the
role of social transfers in alleviating poverty for certain groups.
 Graph 3.2.7:   The likelihood of the old-age poverty rate 
 Source: OECD Pensions Outlook 2014. 
Although the social protection system is
performing its function, there has been an increase in at-risk-of-poverty rates. In 2013, total household disposable income fell by 3.3%, less
sharply than the year before (5.2% in 2012). In real terms, it is now more than
9% lower than in 2008. The substantial decrease of total household disposable
income in 2013 had particular repercussions for the at-risk-of-poverty rate for
children (17.5% in 2013) and doubled the at-risk-of-poverty rate for young
people. While income inequality remains among the lowest in the EU, it has
worsened given the unequal decline in incomes across all brackets. The
persistent low income inequality can be attributed to a compressed wage
structure and a well-targeted allocation of social transfers, which decreases
the risk of poverty by 27.8 pps. (EU average 27.6 pps.). Access to public
services has stagnated since 2012. 
Corrective measures were introduced in
the 2012 social reform to improve access to social transfers. The Act Amending the Social Assistance Benefits Act and the Act
Amending the Exercise of Rights to Public Funds Act, in force since September
2014, have eased entitlement conditions for social benefits. The amendments are
aimed at single-parent families, families with school-age children and large
families, older recipients of social transfers and other vulnerable population
categories. Restrictions in the entitlement conditions for social assistance
benefits introduced in 2012 resulted in a significant decrease in take-up by
older beneficiaries. In the midterm, the government plans to introduce a comprehensive
social activation system, which will link rehabilitation programmes to the
ALMP. By developing comprehensive services for the excluded from the labour
market, the government expects to improve the social inclusion and their
employability. 
 Graph 3.2.8:   Social exclusion indicators 
 % of GDP Source: Eurostat. 
Administrative burden and limited access
to finance hinders doing business in Slovenia.
Suboptimal corporate governance, high tax wedge on skilled work force,
significant involvement of the government in the economy and vested interests
have negative repercussions on doing business in Slovenia. Productivity remains
low in a number of industrial sectors with a high concentration of public
ownership (Section 3.2) and the inflow of foreign direct investment is limited
compared to the EU average (Section 3.3). Frequent changes of the governments
have contributed to uncertainty and the postponement of investment decision.
Nevertheless, Slovenia has developed a flourishing start-up community and
numerous exporters drive the growth of the economy. In search of alternative
ways of funding, several young entrepreneurs have successfully sought financing
for innovative products through crowd-funding portals abroad. 
Reduction of administrative burden
The high number of laws and numerous
changes in the legislation make it difficult to run a business and comply with
local regulation. In the recent years, Slovenia
took several measures to fight red tape. The so-called one stop shop ([79]) has been supporting entrepreneurs in setting up their business and
the use of e-government services has increased (Section 4.5). However, numerous
changes in legalisation have contributed to a significant increase in the
number of laws and bylaws. ([80]) The reduction of administrative burden is one of the key issues
for many stakeholders, including investors, who point to frequent changes of
regulations as a negative feature of doing business in Slovenia. Insufficient
administrative capacity increases waiting times and discourages potential
investors (Section 4.5). This concerns in particular the areas of spatial
planning, construction permits and tax compliance.  ([81]) Spatial planning regulation is decentralised and complex. It falls
under the remit of several government bodies, creating high entrance barriers
and uncertainties for investors, both domestic and foreign. This overregulation
also generates compliance issues. For instance, Slovenian retailers find it
costly and difficult to comply with consumer legislation. In addition, both
retailers and consumers are critical of public authorities' role in ensuring
compliance with consumer legislation. ([82]) 
 Graph 3.3.1:   Components of administrative burden in Slovenia 
 0 = weakest performer country, 1 = best performer country Source: World Bank, DG CNECT, World Economic Forum, DG ENTR, Intrum Justitia, OECD. 
The government has identified several
measures to cut red tape by 25%, but prioritisation and and implementation is
due. The key tool in order to manage the high
regulatory stock is the Single document for better regulation and business
environment and increased competitiveness. ([83]) While the document maps the lengthy processes of licencing and
authorisation, it is not contributing to shortening of the waiting
times. Despite the fact that several measures have been implemented, the
Single document lacks necessary prioritisation, implementation plans and clear
monitoring schemes. Coordination among several ministries and governmental
bodies is equally important for successfully reducing regulatory cost.  In
order to make future laws and regulations more business-friendly, Slovenia
plans to introduce "competitiveness proofing" and the "SME
Test" (the latter has been in pilot phase for several years). However,
introduction of these tools for "better regulation" has been further
postponed to 2016.
Access to finance
Bank lending activity continues to
decline, mainly affecting SMEs. The recent banking
sector recapitalisation is expected to show full results only in 2016.
Restrained bank lending and high interest rates are weighing on the financing
capacity of SMEs (Section 3.1). While the share of rejected loan applications
has decreased over the past six years, the share of SMEs reporting a
deterioration in the willingness of banks to provide loans has increased
substantially and is one of the highest in the EU (Graph 3.3.2). 
Tailor-made financial instruments for
SMEs exist and scope for further upgrading exists.
While the Slovenian development bank SID Banka has had two direct credit
lines for SMEs since mid-2013, only a limited number of SMEs have used them.
They have drawn only a fraction of the available funds (approximately one fifth
of the EUR 500 million), partly due to the stringent application conditions.
The Slovenian Enterprise Fund has been more efficient in providing funding to
innovative SMEs. The Slovenian Enterprise Fund also plans to introduce new debt
and equity instruments, which will focus on start-ups and fast-growing micro
enterprises. In addition, the government is looking into the possibility of
establishing cross-border venture capital together with Austrian and Italian
partners. Finally, the "twin projects" (combining seed financing and
mentoring), recently introduced by the Slovenian Enterprise Fund is a positive
initiative according to stakeholders that can help viable SMEs to increase
their knowledge about available instrument and make them more investment-ready.
However, as bank lending continues to deteriorate for SMEs, there is a need to
build on these new instruments, focusing on alternative financing mechanisms
and attracting more private funding to leverage public investment. 
 Graph 3.3.2:   Willingness of banks to provide the loans in the last six months 
 Willingness of banks to provide a loan has improved (0), remained unchanged (1), deteriorated (2). Source: SAFE survey. 
Provision of services and regulated
professions
The Slovenian services sector is marked
by a low level of cross-border investments. The
level of intra-EU establishment ([84]) is significantly lower in Slovenia than in other EU Member States
(Graph 3.3.3). Slovenia suffers from a low inflow
of foreign direct investment (Section 3.3) and it is below the EU average in
terms of the establishment of foreign firms in the country. This could be
partly explained by the complex regulation of professions and concessions. 
A lack of modernisation of the system of
concessions and regulated professions hampers competition in the Slovenian
service sector. Regulated professions and
concessions limit the number of service providers and choice for consumers
through quantitative and territorial restrictions and tariff setting. The OECD
estimates that the environment for provision of services in Slovenia does not
lead to an effective competition and presents elevated entry barriers for
businesses and individuals. ([85]) Deregulation of professions has been slowly progressing despite
some delays. After deregulating the crafts and cultural sectors, the government
is reviewing existing laws to ease access to regulated professions in the
retail sector. Slovenia is taking part in the mutual evaluation of regulated
professions at EU level. In this context, it will be assessed whether the
restrictions are proportionate and justified by the general interest. Although
the government undertook a review of some of the concessions, no reforms have
been proposed. 
 Graph 3.3.3:   Level of intra-EU establishment 
 Source: EUROSTAT 
Entrepreneurial activity
Start-up and early-stage entrepreneurial activity continued to strengthen in
2013-2014. ([86]) The state of start-up entrepreneurship in Slovenia changed
considerably with the onset of the crisis. Start-ups by
Slovenian founders have risen over USD 130 million since 2006, half of it in
2014. The start-up sector is growing faster than
the economy's average and is creating new jobs with high added value. The Government has been providing support to this industry. ([87]) In order to foster innovation, job
creation and economic growth it
would be important to maintain these efforts and to link all actions to the
existing innovation policies and strategies.
R&D and innovation
The level of R&D investment in
Slovenia has increased considerably but the results have lagged. Increases in R&D investment (Graph 3.3.4) could be attributed to a favourable
system of tax incentives and significant co-financing from the Structural Funds
(Box 3.3.1). ([88]) However, the low performance regarding research and innovation
outputs calls into question the quality of the investments. ([89]) In light of these results and the reliance on the EU funds, the
innovation policy will need to be updated in order to remain sustainable in the
long term. 
An effective policy response to the
R&D challenges is not yet in place. The 2011
Research and Innovation Strategy has not yet been implemented. This strategy
includes important measures to foster knowledge transfer and the
commercialisation of research results. The key measure is the introduction of
institutional funding linked to an assessment of research performance of
universities and public research institutes. Other essential measures include
removing obstacles to university spin-outs and to cross-border venture capital.
The Research and Innovation Strategy needs to be coordinated with the Smart
Specialisation Strategy as well as the forthcoming FDI strategy in order to harness
the country’s potential for smart growth and the knowledge economy. In
particular, implementation mechanisms are needed to direct funding towards
priority areas and increase the impact. Boosting the quality of research
investments, a stronger and more effective overall governance and a focus on
implementation are needed to support the efficient use of resources. 
 Graph 3.3.4:   R&D investment 
 Source: Eurostat 
Finalising the Smart Specialisation
Strategy will be an important milestone. This
strategy will be instrumental for investments under the European Investment and
Structural Funds in the period 2014-2020. The main pending challenges are a
clear prioritisation, consistency with other policies, coordination of
stakeholders and an effective implementation.
 Box 3.3.1: Overview and general assessment of absorption capacity for EU funds    The overall implementation of the Slovenian Cohesion policy's operational programmes has been positive, with Cohesion fund lagging slightly behind. By February 2015, Slovenia drew 81.72% of all allocated funds for the programming period 2007-13 under the ERDF, CF and ESF facilities. This is a positive result compared to the EU28 average (76.74%) or the Visegrad Group average (71.21%). Absorption of the funds has increased in 2014, when EUR 701 million has been certified (51% of the total amount for CF certified so far was done in 2014). In comparison with 2013, Slovenia certified EUR 680 million. Given the N+2 rule for Slovenia, a sum of EUR 597 million (EUR 406 million for CF, EUR 136 million for ERDF and EUR 55 million for ESF) still needs to be spent by end-2015. No funds have been lost so far as a result of the N+2 rule and projections show that the risk of losing funds at closure is limited. However, low absorption capacity and delays related to the Cohesion Fund' implementation (mainly rail and waste-water sectors) result from the late start of the implementation, lengthy permitting and public procurement procedures (Section 3.5) as well as the economic crisis. Graph 1:        EU funds absorption and economic governance 
 ERDF = European Regional Development Fund; ESF = European Social Fund; CF = Cohesion Fund Source: European Commission. 
The level of energy consumption and CO2
emissions in Slovenia is considerably higher than the EU average. Transport is the most energy-intensive sector, with its share in
energy consumption increasing since 2005. This can be partially explained by
the geographical position of Slovenia and the transit passing through the
country. While Slovenia has diversified its sources of energy, it remains
highly dependent on its imports. The contribution of energy deficit to the
trade balance is almost double the EU average (‑5.7% vs. ‑3.1% of
GDP). Slovenia's current primary energy consumption is slightly below the
EU 2020.
Smart, sustainable, interconnected transport
network
A strategy for infrastructure
development in Slovenia is in place. With the
adoption of the Operational Programme for the period 2014-2020, an
implementation framework is now in place with clear policy priorities, coupled
with planning and funding instruments targeting investment in key transport
initiatives. The comprehensive transport strategy will be instrumental for
investments in transport under the European Investment and Structural Funds in
the period 2014-2020, also in light of the expected decrease in national
investment spending. It is expected to contribute significantly to the
development of the transport infrastructure by developing a mature and feasible
project pipeline and thus reducing the bottlenecks especially in the railway
sector.
Development of rail infrastructure and
promotion of public transport are the key priorities. The TEN-T core network projects on the Mediterranean and the
Baltic-Adriatic Corridors will be given priority under the Connecting Europe
Facility. This includes the new second railway track line Divača-Koper and
the upgrading and extension of the port of Koper. The need to modernise the
railway infrastructure could go hand-in-hand with the removal of market
barriers in the railway sector and better performance of rail services. Urban
transport in Slovenia still suffers from an excessive reliance on private cars.
Development of public transport in Slovenian cities remains crucial and could
be inspired by the positive experiences in some cities, in particular
Ljubljana.
Interconnected Energy Networks
The Slovenian energy networks face
several challenges. The energy mix in Slovenia is
mainly derived from hydrogenation (31%), nuclear power (24%) and fossil fuel. 
The electricity interconnection capacity
could be further improved.  The interconnection
capacity is currently at 82% of the production capacity in Slovenia, which is
higher than the EU Average (at XX% in 2013). Nevertheless, Slovenia has several
electricity Projects of Common Interest under the guidelines for trans-European
energy infrastructure, including two electricity clusters with a high voltage
transmission line between Slovenia, Croatia and Hungary and a high voltage
transmission line between Slovenia and Italy. 
Competition in the electricity market
has accelerated. In 20XX, almost 50,000 customers
switched their electricity supplier, with no one supplier dominating the
market. The entry of a new supplier (GEN-I) in the gas sector also lead to
lower prices for the first time since 2009. Geoplin remained the company with
the largest market share (around 63%) in gas distribution.
Slovenia has a diversified gas supply
but lacks storage facilities and is entirely dependent on imports. A new North-South gas interconnection to the Hungarian gas
transmission network and reinforcement of the interconnection to the Croatian
gas transmission network will increase security of supply in Slovenia and the
neighbouring countries. Several gas projects of common interest are highly
relevant for Slovenia. In particular the LNG terminal in Krk (Croatia) could
provide the security of supply to the region.
Environmental compliance and beyond
Slovenia is the best performing member
state in terms of municipal waste recycling among the countries that have
joined the EU since 2004. Slovenia's recycling rate
reached 47% in 2012. The municipal waste generation remained relatively low, at
362 kg per capita in 2012 compared to the EU average of around 490 kg.
Landfilling decreased from 58% in 2011 to 51% in 2012 but remains high. Further
measures could look at penalising the excessive use of landfills. 
Investing in the water sector in order
to comply with EU environmental legislation is a key priority. In particular, compliance gaps persist as regards Slovenia’s
Accession Treaty obligations for the wastewater sector. The final deadline for
reaching compliance with the Urban Wastewater Treatment Directive is the
end of 2015. The last available data for Slovenia shows compliance rates for
collection and treatment of 30% in 2009 and 2010.
Slovenia's diverse and rich natural
environment is a key element of its tourism strategy. Its biodiversity has been well preserved and Slovenia has the
biggest share of land area covered by Natura 2000 in the EU (37.85% vs. EU
average of 18.4%). ([90])
Well-preserved nature delivers multiple socio-economic benefits. It has been
recognised in the Slovenian Tourism Development Strategy for 2012-2016 as a key
attraction for tourism. 
Broadband
Broadband networks are the key
infrastructure of the digital economy and society. ([91]) It has been
estimated that a 10 percentage point increase in broadband penetration is
associated to an annual growth in per-capita GDP of some 1 to 1.5 percentage
points. ([92])  Slovenia
has a very low fixed high-speed broadband penetration (ranking 26th
out of 28 member states). Also mobile broadband take-up remains comparably low.
Operators indicated that this is due to lack of market demand. This might also
result in comparably high prices (Slovenia ranks 19th out of the 28
member states). Slovenia is currently in the process of adopting a Broadband
plan. 
In Slovenia, the general government
effectiveness score and the responsiveness of administration remain below the
EU average (Graph 3.5.1). 
 Graph 3.5.1:   Institutional strengths and weaknesses in Slovenia 
 Source: WEF Global Competitiveness report 2014-15. 
E-government
Slovenia shows mixed performance in
adopting the use of e-government tools.  Slovenia
performs rather well in indicators related to starting up a business and the
increasing use of e-government. From 2015, business interaction with the
authorities will be based exclusively on an e-invoicing system. However, the
conversion of state services to electronic systems has not been fully
implemented as administrative and business procedures have not been
sufficiently computerised, and there is often inadequate connection between
front and back-office activities. The transition to e-procurement is expected
to take place in the course of 2015. To date, an electronic portal has been
launched and e-notifications have been enabled. Other services will be
introduced gradually (e-auctions, e-contracts and interoperability with other
governmental databases). As the electronic tenders system is not yet
operational, Slovenia currently has the lowest share of e- procurement in the
EU. ([93])  The Point
of Single Contact for services has yet to be finalised and all procedures have
yet to be made available online. 
Efficiency of Public Administration
Government effectiveness in Slovenia is
below the EU average. ([94]) The indicator of government effectiveness improved somewhat in the
period 2008-2012 and is the highest in comparison to its regional peers (Graph 3.5.2). However, the governance
effectiveness indicator in 2012 was lower than in 1996, the aftermath of the
country’s independence, when the institutions first had to be established. The
effectiveness of public administration in Slovenia was adversely impacted by
the lack of strategic planning and budgeting, weak governance and
implementation of strategies, as well as insufficient rationalisation of
internal functions and structures. ([95]) The deterioration in the perception of the government performance
could be linked to the severe economic crisis and the numerous changes of the
government in recent years. 
The government strategy for development
of public administration 2015 – 2020 will aim at modernizing the public
administration and improving its quality. The
strategy is expected to address strategic planning of legal, organisational and
procedural aspects, human resource management and the fight against
corruption. It is in public consultation and is expected to be adopted by
the end of February 2015. The central element of the strategy is to enhance the
implementation capacity of Slovenia's public administration. Various strategies
already prepared in the field have lacked implementation and enforcement plan. 
 Graph 3.5.2:   Government effectiveness 
 Source: Public Administration Scoreboard 2014. 
Enhancing the administrative capacity of
institutions in order to reap the full benefits from the cohesion remains a
challenge. useful tool to achieve these
improvements will be the technical assistance available in the operational
programme for the new financial perspective 2015-2020. In the 2007-2013 period
it was underused due to a very low allocation. The increase in technical
assistance funds will co-finance activities such as staffing, evaluations,
communication and trainings. The spatial planning and the issuance of environmental
and building permits tend to be time intensive. A national analysis of the
organisation of operations of municipalities shows that the lack of staff and
financial capabilities, especially of smaller municipalities, is impeding
efficient organisation of work. 
Justice Reforms
The efficiency of the courts further
improved in 2014, although at a slower pace.  Positive
trends in the rate of resolving civil and commercial cases and the length of
proceedings have been maintained and the backlog has been further reduced by
18%. In the area of enforcement, further improvements are expected as a result
of recent amendments to enforcement legislation, which improved the enforcement
of real estate and the decision-making process. The remit of the Supreme Court's
project of updating business processes at courts (including case management
reforms) was expanded to cover enforcement and labour and social courts.
Several draft laws were proposed with the aim of providing more transparency
and objectivity to the process of appointment of judges, reinforcing the
Judicial Council in the area of ethical standards, and  improving the procedure
for acquiring free legal aid. 
The lengthy proceedings and a high
number of unresolved cases remain a challenge. The
reduction in litigious civil and commercial cases can be partly attributed to a
13% decrease in the number of new cases in 2014 (compared to 2013 data), as the
number of resolved cases decreased as well by 3%. Similarly, a decrease of
more than 60,000 incoming cases partly helped to maintain a positive trend in
the area of enforcement. Slovenia had the second highest backlog and the
highest number of incoming civil, commercial, administrative and other
non-criminal cases per inhabitant in the EU. ([96]) Uneven workload of judges is to be partly addressed through
management and court specialisation measures. The Judicial Council aims to
improve the quality of the justice system, particularly through improving the
appointment process and the training of judges. A large surge in incoming
insolvency cases has led to an increase in the pending insolvency cases before
the Commercial courts. The increase can be partly attributed to new and amended
reorganisation procedures and financial incentives for filing insolvency since
2013. In 2014, Slovenia had the lowest percentage of consumers in the EU who
found it easy to resolve disputes with businesses through courts and through
out-of-court bodies. ([97])
Insolvency
legislation
There has been progress in amending the
insolvency framework. In January 2015, the
authorities presented an advanced version of the on-going evaluation exercise
of the laws adopted in 2013, which amended and complemented the insolvency law.
The authorities have indicated that they do not currently see a need for further
amendments to the insolvency framework. The key finding of the evaluation is
that the new framework allows more restructuring opportunities to companies in
financial difficulties. In addition, the existence of such legal tools has
reportedly provided an indirect incentive to the parties to negotiate and reach
out-of-court settlements. 
Protection of competition 
The Competition Protection Agency faces
hurdles that hamper the effective enforcement of the competition rules. The budgetary autonomy and the independence of the Competition
Protection Agency have been maintained. However, the Agency continues to face
challenges that reduce the effectiveness of their enforcement actions. The Competition
Protection Agency lacks the power to impose fines on undertakings directly in
its administrative decision, having to conduct separate minor offence
proceedings. These misdemeanour proceedings involve different standards from
the administrative procedure and give rise to legal uncertainty. In practice,
the Agency waits until its administrative decision has become final before
starting the fines proceedings. Given that the administrative judicial review
until recently appeared rather lengthy, the infringement often became
time-barred before the Agency was able to impose a fine. The amendments of 2013
regarding the competent court in first instance administrative judicial review
of competition cases could lead to shortening the duration of the review
process in cases where the first instance judgement is not appealed. Yet the
existing framework affects the effective enforcement by the Competition
Protection Agency and could lead to limited imposition of fines and under
deterrence. 
Credibility of institutions
Credibility of institutions is
essential. Allegations of corruption, political
interference and doubts regarding the integrity of high-level officials within
the public administration at state and local level and in state-owned companies
came to public attention in 2013-2014. The perception regarding the diversion
of public funds has worsened substantially in Slovenia and now stands far below
the EU28 average (Graph 3.5.3). 
Irregularities in public tender
procedures have led to the interruption of payments from the cohesion funds. While these particular malpractices have been corrected and
payments restored the perceptions of widespread systemic corruption
remains. In spite of limited progress in achieving transparency,
vulnerabilities are broadly noted in the energy, construction, urban planning
and healthcare sectors, where anti-corruption safeguards have limited impact. 
A new two-year programme to fight
corruption was adopted in January 2015. The first
programme of 15 measures for prevention of corruption, adopted in March 2014,
lacked implementation due to the change in government. The government
reiterated its commitment to fight corruption. The new programme includes
11 perennial measures targeted at restoring the quality and credibility of
public administration in Slovenia, including the public procurement and the
ethic codex for politicians and government officials. Another major element in
the fight against corruption is to enhance the credibility of the Commission
for Prevention of Corruption.
 Graph 3.5.3:   Diversion of public funds 
 Source: Public Administration Scoreboard 2014. 
 Commitments || Summary assessment([98]) 
 2014 Country-specific recommendations (CSRs) 
 CSR 1: Reinforce the budgetary strategy with sufficiently specified structural measures for the year 2014 and beyond, to ensure correction of the excessive deficit in a sustainable manner by 2015 through the achievement of the structural adjustment effort specified in the Council recommendation under the Excessive Deficit Procedure. A durable correction of the fiscal imbalances requires a credible implementation of ambitious structural reforms to increase the adjustment capacity and boost growth and employment. After the correction of the excessive deficit, pursue a structural adjustment of at least 0,5 % of GDP each year, and more in good economic conditions or to ensure that the debt rule is met in order to put the high general government debt ratio on a sustained downward path. To improve the credibility of fiscal policy, complete the adoption of a general government budget balance/surplus rule in structural terms, make the medium-term budgetary framework binding, encompassing and transparent, and establish the necessary legal basis for a functioning fiscal council defining its remit within the budgetary process and introducing clear procedural arrangements for monitoring budgetary outcomes as soon as possible. Launch a comprehensive review of expenditure covering state and local government levels, direct and indirect budget users and municipality-owned providers of utilities and services in the area of healthcare by the end of 2014 with a view to realising budgetary savings in 2015 and beyond. || Slovenia has made some progress in addressing the CSR 1 (this overall assessment of CSR 1 excludes an assessment of compliance with the Stability and Growth Pact): Progress has been made regarding the adoption of the Fiscal Rules Act (passed the first reading in the parliament in January 2015 and is expected to be adopted in Q1 2015). The Public Finance Act will be amended within six months of the adoption of the Fiscal Rules Act and will contain detailed provisions defining the drafting, implementation and monitoring of the budget of all general government institutional units. ·       Some progress has been made regarding the expenditure review in the healthcare sector. The authorities have indicated that the review will be undertaken in cooperation with the European Observatory for Health policies and the World Health Organisation. A draft scope for the review has been prepared and a workshop was held in January 2014 to finalise the proposal. It is intended that the project will be wider than just expenditure and will include; (i) an analysis of the financing of the health system, (ii) an expenditure review (ii) a review of benefit basket and (iv) an assessment of health technology. The expenditure review and the National Healthcare Resolution will be a base for comprehensive healthcare reform. 
 CSR 2: Based on the public consultation, agree measures to ensure the sustainability of the pension system and adequacy of pensions beyond 2020, encompassing adjustments of key parameters, such as linking the statutory retirement age to gains in life expectancy and encouraging private contributions to the second pillar of the pension system. Contain age‐related expenditure on long-term care by targeting benefits to those most in need and refocusing care provision from institutional to home care. || Slovenia has made limited progress in addressing the CSR 2: Some progress has been made in alleviating the pressures on the mid-term sustainability and adequacy of the pension system but key parameters still need to be adjusted.  In January 2015 the results of the evaluation of the impact of the 2013 pension reform were published. Fiscal savings have been realised over 2013-14 and further containment of the pension-related expenditures is expected for the period 2014-20. Elements of a further pension system reform are to be discussed in the context of a White Book, due to be published in mid-2015. The Legal act for the Establishment and Functioning of the Demographic Fund is expected to be adopted in June 2015. No progress has been made regarding the long term care reform. The blueprint for the long term care reform was adopted in September 2013. The adoption of the law will be postponed to the end of 2015 in order to match it with the reform of health insurance schemes. 
 CSR 3: Following consultation with social partners and in accordance with national practices, develop a comprehensive Social Agreement by the end of 2014 ensuring that wage developments, including the minimum wage, support competitiveness, domestic demand and job creation. Redefine the composition of the minimum wage and review its indexation system. Take measures for further decreasing segmentation, in particular addressing the efficiency of incentives for hiring young and older workers and the use of civil law contracts. Adopt the Act on Student Work. Prioritise outreach to non-registered young people ensuring adequate public employment services capacities. To increase employment of low-skilled and older workers, adapt the working environment to longer working life and focus resources on tailor-made active labour market policy measures, while improving their effectiveness. Address skills mismatches by improving the attractiveness of vocational education and training and by further developing cooperation with the relevant stakeholders in assessing labour market needs. || Slovenia has made substantial progress in addressing the CSR 3: Some progress has been made regarding wages, with the exception of the minimum wage. The Social Agreement has been fully accomplished (concluded in January 2015).  The Social Agreement establishes the basis for private sector wage setting on ground of collective agreements, inflation and a share of sectorial productivity while growth of public sector wages has to lag behind private sector wage growth. The Social Agreement does not address the minimum wage. The evaluation of the 2013 labour market reform shows that some progress has been made in addressing labour market segmentation. Limited progress has been made in addressing the employment of low-skilled and older workers. The Student Work act has been fully addressed. The draft Act on Occasional Student Work was incorporated into the December 2014 Public Finance Balance Act and entered into force in February 2015. Substantial progress has been made regarding the Youth Guarantee Programme. The implementation of Youth Guarantee Programme is on track. 22,000 young are included in the measures; 90% of them received an offer from the public employment services Substantial progress has been made in addressing skills mismatch. In 2014 a proposal for the Act on the Slovenian Qualifications Framework was prepared and the Scholarship Act came into force. Scholarships for deficient professions will be awarded starting from January 2015. The employment services are preparing a bi-annual forecast of deficient occupations in parallel to the establishment of the National Career Point. 
 CSR 4: Complete the privatisation of NKBM in 2014 as planned, prepare Abanka for privatisation in 2015, continue the prompt implementation of restructuring plans of the banks in receipt of State aid and the necessary consolidation of the banking sector. Based on the lessons from the asset quality review and stress test finalise the comprehensive action plan for banks in August 2014, including specific measures to improve governance, supervision, risk management, credit approval process and data quality and availability. Reinforce banks' capacity to work out non-performing loans by strengthening the internal asset management and restructuring units. Clarify the mandate of the Bank Asset Management Company by publishing a comprehensive management strategy and business plan by September 2014, detailing its role in restructuring of its assets, redemption targets, budgets, asset management plans and expected returns, while ensuring adequate resources. || Slovenia has made substantial progress in addressing the CSR 4: Substantial progress has been made regarding the privatisation of NKBM. Binding offers for NKBM have been submitted. Negotiations are in the final stage and the government aims to sign the sales agreement in the first quarter of 2015. The privatisation process of Abanka is expected to be launched in January 2016 once the merger with Banka Celje is completed. The operational restructuring of the four major state-owned banks (NLB, NKBM, Abanka and Celje) and the wind-down of two smaller domestic banks are on track. Substantial progress has been made regarding further stabilisation of banking sector. The recapitalisation of Abanka was implemented in October 2014 and the recapitalisation of Banka Celje took place at the end 2014. Substantial progress has been made regarding the banking sector action plan. A comprehensive action plan for banks has been finalized and submitted to the Prime Minister office in January 2015. Bank of Slovenia has ensured follow-up of the shortcomings identified by the 2013 AQR and will resume on-site inspections in Q1-2015 to verify whether the recommendations have been implemented by banks.  Substantial progress has been made regarding the banks' workout capacity. The major banks have reorganized and reinforced their work-out and restructuring units. Substantial progress has been made regarding the Bank Asset Management Company, which has set out its strategy and business plan and is fully operational. Certain amendments to the legislation still need to be adopted. 
 CSR 5: Continue to implement the privatisations announced in 2013 with the time-frames set. Adopt a strategy for the Slovenian Sovereign Holding with a clear classification of assets in line with the timeline and definitions established in the 2014 Slovenian Sovereign Holding Act. By November 2014, commit to a short-term (one- to two- year horizon) divestment schedule for a number of well-targeted assets with a clear time scale. Make it fully operational as a vehicle for the management of assets remaining in State ownership and divestment of the assets earmarked according to the management acts, within the time frame stipulated by the law. By September 2014, adopt and implement a corporate governance code for state-owned enterprises to ensure professional, transparent and independent management. || Slovenia has made some progress in addressing the CSR 5: ·       Some progress has been made regarding the privatisation. Three companies from the list of 15 have been divested, including Aerodrom Ljubljana, while direct state ownership in one company has been diluted following a debt-to-equity swap. The sale of Telekom Slovenije and NKBM, the two biggest assets on the list, are in a final stage. Signing expected in April and March 2015 respectively. ·       Limited progress has been made in adopting the Slovenian Sovereign Holding strategy and the short-term divestment schedule for state-owned assets. ·       Substantial progress has been made regarding the operationalization of the Slovenian Sovereign Holding. In December 2014 the Slovenian Sovereign Holding has adopted an Asset Management Policy and a management contract between the Slovenian Sovereign Holding and the Government is signed, determining the payment of management fees to the first. In December 2014, an open public process was launched for compiling a list of candidate members for the new supervisory board of Slovenian Sovereign Holding. A special committee was to evaluate the submitted applications. In January 2015, a compliance officer was appointed by Slovenian Sovereign Holding. In January 2015 Slovenian Sovereign Holding became the sole owner of PDP. In October 2014 Slovenian Sovereign Holding acquired all the assets previously owned by DSU.   ·       The new corporate governance code has been fully addressed. It was adopted by the supervisory board of Slovenian Sovereign Holding in December 2014. 
 CSR 6: Finalise a corporate restructuring master plan by the end of 2014 within clear priorities and effective implementation process. Set up a central corporate restructuring task force monitoring and coordinating the overall restructuring process, providing the necessary expertise, guidance and advice, and facilitating the negotiation process between all stakeholders involved. Establish a list of the most urgent restructuring cases, while maximising the recovery value for creditors. Promote the use of the available legal mechanisms and international best practices to all stakeholders in the restructuring process. Evaluate recent changes in the insolvency legislation by September 2014, being ready to introduce any additional necessary measure. Further reduce the length of judicial proceedings at first instance in litigious civil and commercial cases including cases under the insolvency legislation, and the number of pending cases, in particular enforcement and insolvency cases. || Slovenia has made substantial progress in addressing the CSR 6: ·       The corporate restructuring master plan and the central task force have been both fully addressed. In December 2014 the restructuring master plan has been finalised. In January 2015 a centralised corporate restructuring task force was established to monitor and coordinate the overall restructuring process, to facilitate the negotiation process between all stakeholders involved, to promote the use of the available legal mechanisms and out-of-court solutions and to provide the necessary guidance and advice. ·       Substantial progress has been made regarding the restructuring of most urgent restructuring cases.  ·       The evaluation of recent changes in the insolvency legislation has been fully addressed. In January 2015, the authorities presented the advanced version of the on-going evaluation exercise of the laws adopted in 2013 which amended and complemented the insolvency law. The authorities do currently not see a need for further amendments to the insolvency framework. The key finding of the evaluation is that the new framework allows more restructuring opportunities to companies in financial difficulties. ·       Some progress in reducing the length of judicial proceedings at first instance in litigious civil and commercial cases (incl. cases under the insolvency legislation) has been made, however the length of trials and backlogs remain still significant. 
 CSR 7: Reduce obstacles to doing business in Slovenia in key areas for economic development rendering the country more attractive to foreign direct investment particularly through accelerated liberalisation of regulated professions, reduction of administrative burden including leaner authorisation schemes. Ensure sufficient budgetary autonomy for the Competition Protection Agency (CPA) and increase its institutional independence. Streamline priorities and ensure consistency between the 2011 Research and Innovation and the 2013 Industrial Policy Strategies with the upcoming strategies on Smart Specialisation and Transport, ensure their prompt implementation and assessment of effectiveness. || Slovenia has made some progress in addressing the CSR 7: ·       Limited progress has been made regarding the promotion of FDI. The new FDI Strategy is expected to be adopted in Q1 2015. ·       Some progress has been made regarding the deregulation of professions. The number of regulated professions has decreased from 323 to 242 ·       Some progress has been made regarding the reduction of administrative burden. 25% of measures included in the Single document were implemented. ·       Substantial progress has been made in ensuring sufficient budgetary autonomy for the Competition Protection Agency and in maintaining its institutional independence. ·       No progress has been made regarding leaner authorisation schemes and the implementation of the National Research policy. ·       Some progress has been made regarding the Smart Specialization Strategy. The adoption of the Strategy is foreseen in April 2015. ·       Some progress has been made regarding the comprehensive Transport Strategy. Public and cross-border consultations on the draft strategy (dated 15 October 2014) were held and the draft is foreseen to be revised to reflect the relevant observations and comments received. The Strategy is expected to be adopted in September 2015. ·       Limited progress has been made regarding the streamlining of priorities and ensuring consistency among the existing strategies. 
 CSR 8: Take effective measures to fight corruption, enhancing transparency and accountability, and introducing external performance evaluation and quality control procedures. || Slovenia has made some progress in addressing the CSR 8: ·       Some progress has been made regarding the fight against corruption. The new government reiterated its commitment to fight corruption and adopted a new two-year programme of 11 perennial measures in January 2015. ·       Some progress has been made regarding the transparency and accountability. A comprehensive public-sector reform is in public consultation and is expected to be adopted by the end of February 2015. ·       No progress has been made regarding report on performance evaluation and quality control procedures. 
 Europe 2020 (national targets and progress) 
 Employment rate (%): 75 % || In 2013 Slovenia moved away from the target (63.3% in 2013 comparing with 64.1% in 2012), however quarterly data in 2014 shows some improvements. 
 R&D target:  3%  of GDP || R&D intensity in Slovenia increased from 1.36% in 2000 to 2.59% in 2013.  During period 2007-2013, R&D intensity has been growing at an annual rate of 7.8%. If this trend is sustained, Slovenia's R&D intensity target of 3% for 2020 is achievable. In spite of the economic crisis business expenditure on R&D as a percentage of GDP increased from 0.79%% in 2000 to 1.98 % in 2013, making Slovenia one of the top performers in the EU in terms of business R&D. Slovenia is therefore on track towards its R&D intensity target of 3% for 2020. The main challenge remains the efficient and effective use of available resources in order to secure the economic benefits of this investment. 
 National Greenhouse gas (GHG) emissions target: 4% increase in 2020 compared to 2005 (in non-ETS sectors) || According to the latest national projections and taking into account existing measures, Slovenia is on track to meet its target on GHG emissions in the sectors not covered by the EU Emissions Trading System (ETS), as GHG emissions are projected to increase by around 4% (compared to 2005) by 2020. By reducing emissions by 7% between 2005 and 2013, based on latest projections the interim target for 2013 will be overachieved by a margin of 9 percentage points. 
 2020 Renewable energy target: 25% Share of renewable energy in all modes of transport: 10% || Slovenia has increased its renewable energy share to 23.5% (2013) from 20.9% in the previous year;  the renewable share in transport has increased to 2.9% (2012) from 2.1% in the previous year. Progress is fairly steady and on track towards its 2020 target (25%). There are no complaints, EU-pilots/infringement procedures against Slovenia concerning the Renewable Energy Directive. 
 Energy Efficiency target: 10 809 GWh saving   By 2020: level of 7.31 Mtoe primary consumption (5.09 Mtoe expressed in final energy consumption)   || Even if Slovenia's current primary energy consumption (6.9 Mtoe in 2012) is slightly below its 2020 target, additional efforts regarding EE are needed to keep the primary energy consumption at this level or to minimise its increase if the GDP increases again during the next six year period. The target was set at a rather unambitious level and Slovenia is among the very few countries which failed to submit its National Energy Efficiency Action Plan (NEEAP). Only limited progresses have been made in implementing the Energy Efficiency Directive (EED) and the Commission is monitoring closely its transposition. 
 Early school leaving target: 5 % || The target has been achieved. Early school leaving fell from 5.6 % in 2006 to 3.9 % in 2013. 
 Tertiary education target: 40 % || Tertiary education rates continuously improved and reached the target in 2013 (40.1 %) 
 Target for reducing the population at risk of poverty or social exclusion: 40 000 (compared to 360 000 in 2008) || Poverty and social exclusion have continued to increase in Slovenia in 2013, taking the country further away from its poverty and social exclusion target (320.000). The number of people at-risk-of-poverty or social exclusion increased and reached 410,000 in 2013. 
 Table AB.1:     Macroeconomic indicators 
 Notes:                                                                                                                                                                                                          1 The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices. 2 The indicator of domestic demand includes stocks.                                                                                                                                                 3 Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.                                                                                                                                                           
 Source: European Commission 2015 winter forecast (COM); European Commission calculations 
 Table AB.2:     Financial market indicators 
 Notes: 1) Latest data November 2014.                                                                                                                            2) Latest data Q3 2014.                                                                                                                                             3) Latest data September 2014.                                                                                                                           4) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included.                                      * Measured in basis points                                                                                                                             
 Source: IMF (financial soundness indicators), European Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators). 
 Table AB.3:     Taxation indicators 
 Notes:                                                                                                                                  1. Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation.  2. This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.                                                                                                                                3. VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends.                                                                                                                                 
 Source: European Commission 
 Table AB.4:     Labour market indicators 
 Notes:                                                                                                                                                          1 Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.                                                   2 Long-term unemployed are persons who have been unemployed for at least 12 months.                                                             
 Source: European Commission (EU Labour Force Survey and European National Accounts) 
 Table AB.5:     Social indicators 
 Notes:                                                                                                                                  1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).                               2 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income.                                                                                                                                3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone.                                                                                                                                          4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes)                                                                                                                                       6 2014 data refer to the average of the first three quarters.                                                                                                                                    
 Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table AB.6:     Product market performance and policy indicators 
 (1) Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.       (2) Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting.        (3) The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology.        (4) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       (5) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
 Source: Commission services, World Bank - Doing Business (for enforcing contract and time to start a business) and OECD (for the product market regulation indicators). 
 Table AB.7:     Green Growth 
 Country-specific notes:         2013 is not included in the table due to lack of data.        General explanation of the table items:        All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)                  Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)                  Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)                  Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                  Waste intensity: waste (in kg) divided by GDP (in EUR)        Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP          Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP        Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)        Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’        Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)         Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP        Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.        Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste        Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP        Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency       Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)        Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector        Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels        Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin        Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents * European Commission and European Environment Agency    ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.    *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2. 
 Source: European Commission unless indicated otherwise, European Commission calculation 
([1])  The Commissio's export performance
indicator measures the  increase in the value of exports of goods and services
relative to the increase of export-weighted imports of goods and services of 36
trading partners.
([2])  The general government deficit
increased to 14.6% of GDP in 2013, of which 10.1% of GDP was related to bank
recapitalisations.
([3])  The label "active
deleveraging" is used when negative credit flows are the main driver of
the reduction of debt/GDP ratios (because of its effect on the nominal size of
the sectors' balance sheet). "Passive deleveraging" refers to the
situation when nominal GDP growth drives or contributes to the debt-to-GDP reduction.
([4])  "Excess debt" is the debt of
companies which are highly leveraged, i.e. have a leverage ratio exceeding 5 -
a commonly accepted credit risk threshold. 
([5])  Annex 1 of Bank of Slovenia's Stability
of the Slovenian banking system report from December 2014 (https://www.bsi.si/en/publications.asp?MapaId=1357)

([6])  According to analysis of the Institute
of Macroeconomic Analysis and Development of the Republic of Slovenia (IMAD).
([7])  Quarterly report on the euro area. Volume
13 (2014) Issue 3.
([8])  For more details, please consult
information published on the ECB web page: https://www.ecb.europa.eu/ssm/assessment/html/index.en.html
([9])  NLB issued a EUR 300 million 3-year
unsecured bond at a 3% yield on the Luxemburg market. Further bond offerings
are envisaged in the near future.
([10]) There are few exceptions. Sperbank has
increased its balance sheet from EUR 904 million in 2009 to EUR 1.5 billion in
2013. 
([11]) Raiffeisen Bank International decided
to exit the Slovenian market.
([12]) In 2014 some Slovenian corporates have
managed to issue unsecured bonds in the amount of EUR 200-300 million in the
domestic market at lower rates than those offered by the banks.
([13]) The debt leverage ratio represents the
level of debt relative to the company's cash flow capacity. The debt leverage
ratio is defined as the total financial debt net of cash and cash equivalents
on balance sheet divided by the earnings before interest, tax, depreciation and
amortisation. Companies are defined as "highly leveraged" if their
leverage ratio exceeds 5 - a commonly accepted credit risk threshold.   
([14]) Based on microeconomic data provided by
Bank of Slovenia (see section 4 in the 2014 IDR).
([15]) According to analysis of the Institute
of Macroeconomic Analysis and Development (IMAD) based on data provided by the
Agency of the Republic of Slovenia for Public Legal Records and Related
Services (AJPES).
([16]) EBITDA margin is defined as EBITDA divided
by revenues. It is commonly used to indicate the ability of a company to
service debt. 
([17]) Based on data provided by Bank of
Slovenia. The non-performing loan ratio used by Bank of Slovenia is not
consistent with non-performing loan ratios reported by analysts which report
significantly higher non-performing loan ratios for Slovenian banks. 
([18]) There are a couple of outliers, with
Celje and SKB presenting a very high coverage ratio.
([19]) The Bank Asset Management Company is
classified inside the general government sector as it is, according to Eurostat
treatment, a 100 % government-owned entity with no autonomy of decision.
([20]) State-owned enterprises are defined as
companies in which the state has a majority ownership (50%+1). State-controlled
enterprises are defined as companies in which the state has at least a
controlling minority ownership of (25%+1). The cut-off date for the ownership
structure is 31 December 2014.     
([21]) Before the establishment of the SSH in
2014, the direct ownerships of the Republic of Slovenia were managed under the
umbrella of the Capital Assets Management Agency (AUKN). AUKN was established
in the context of Slovenia's OECD accession in 2010. According to the legislation
adopted in December 2012, AUKN was to be replaced by the Slovenian Sovereign
Holding (SSH), with the aim of consolidating and managing all state assets under
one structure, and allowing for the privatisation of some of these assets.
However, the political context has delayed the process of setting up SSH, and
AUKN as a management structure was temporarily replaced by the state fund SOD.
SOD was finally transformed into SSH in June 2014 under a new framework.
([22]) PDP was gradually acquired by SSH from
KAD in July 2014 and January 2015 and it will be merged into the SSH in the
course of 2015. 
([23]) All assets (including shares in different
companies) owned by DSU were acquired by SSH in October 2014. 
([24]) Level of importance of State-owned
enterprises/State-controlled enterprises is defined according to sales, assets,
equity, profit, loss, equity, financial debt, employees.
([25]) Currently data is only available for
Romania and Croatia. 
([26]) In all graphs, sector definitions
follow the NACE Rev. 2 classification, e.g. consumer staples - manufacturing of
consumer staples (food, tobacco, textiles, wood and cork, paper, printing
etc.); other manufacturing (jewellery, musical instruments, sports goods, games
and toys, medical and dental instruments and supplies); other services (legal
and accounting, management consultancy, architectural, engineering, scientific
research and development); materials - manufacturing of materials (rubber and
plastic products, non-metallic mineral products, basic metals); ICT -
information and communication technologies; durables -manufacturing of durables
(fabricated metal products, electrical equipment, machinery, motor vehicles,
trailers, other transport equipment); chemicals and pharma – manufacturing of
chemicals and pharma (coke and refined petroleum products, chemicals and
chemical products, basic pharmaceutical products).
([27]) Including SID bank – the national
development bank (owns 4% of total assets). Data as of end 2013.  
([28]) 2013 Indicators of Product Market
Regulation comprised by OECD: http://www.oecd.org/economy/growth/indicatorsofproductmarketregulationhomepage.htm#Sources

([29]) The financial performance of the non-financial
sector is analysed separately from the banking and financial sector as their
performance indicators and are examined separately in Section 3.1. Comparison
of financial performance (profitability and indebtedness) with national and
regional peers is based on a simple regression, controlled for year, industry
and type of ownership (State-owned enterprises/State-controlled enterprises,
private domestic and private foreign). Financial performance and productivity
of the energy, transport and utilities sector is only analysed relative to
regional peers as these sectors are natural monopolies and are dominated by
State-owned enterprises/ State-controlled enterprises in Slovenia and in other
countries. Therefore, comparison with foreign and privately owned national
peers is not relevant.  
([30]) The (debt) leverage ratio represents
the level of debt relative to the company's cash flow capacity. The leverage
ratio is defined as the total financial debt net of cash and cash equivalents
on balance sheet divided by the earnings before interest, tax, depreciation and
amortisation (EBITDA). 
([31]) Excluding the energy and the public
utilities sectors, which are natural monopolies and dominated by State-owned
enterprises/State-controlled enterprises and therefore are less sensitive to
the economic downturn than other sectors.
([32]) Please note that the financial services
sector does not include banks and insurance companies but only other financial
services such as investment funds and leasing companies. This category also
includes most of the financial holdings, which are specific to the Slovenian
economy - funds that invested in companies using high debt and relatively low
proportion of own equity. 
([33]) The operating profit, which is
represented by the earnings before interest, tax, depreciation and amortisation
(EBITDA) on the profit and loss account, is common proxy for the cash flow
capacity of the company.     
([34]) This refers to aggregated financial
data of SOE and State-controlled enterprises by sector from AJPES accounts and
should not be confused with sector/industry accounts form the national accounts
data. 
([35]) Return on equity defined as the amount
of net income returned as a percentage of shareholders equity. Return on equity
is a common measure of a company's profitability, revealing how much profit a
company generates with the money shareholders have invested.
([36]) Return on capital employed is defined
as the amount of operating profit (earnings before interest and tax, EBIT) as a
percentage of capital employed (the sum of shareholders' equity and debt
liabilities). Return on capital employed is a common measure of a company's
profitability and the efficiency with which its capital is employed.     
([37]) Following the approach in a recent
World Bank study (Iootty, M., P. Correa, S. Radas, B. Skrinjaric (2014). Stylized
Facts on Productivity Growth: Evidence from Firm-Level Data in Croatia. Policy
Research Working Paper, No. 6990, the World Bank), labour productivity and
total factor productivity are used as important performance indicators. To
calculate labour factor productivity value added and employment are used, while
for total factor productivity (TFP), the methodology by Levinsohn and Petrin is
implemented (Levinsohn, J., & A. Petrin (2003). Estimating Production
Functions Using Inputs to Control for Unobservables. Review of Economic
Studies, Vol. 70, No. 2, 317-342), which corrects for productivity shocks
unobserved by the researcher but observed by the firm. The estimates are based
on a simple regression controlled for year, industry and ownership type (State-owned
enterprises/State-controlled enterprises, private domestic and private foreign
ownership).   
([38]) This takes into account all direct
capital/ equity increases of state owned or state controlled banks done by the
state from 2007-2014, including the conversion of CoCo bonds (contingent
convertible bonds, i.e. converted into cash if certain conditions are
fulfilled) and other hybrid bonds issued by the state. It is reduced by
dividends paid and any gains IPO/ SPO transactions for the period 2007-2014. It
also includes the cost of setting up the Bank Asset Management Company (EUR
1.7billion in equity and bonds) as this is consolidated with general government
accounts following, according to Eurostat treatment.         
([39]) Foregone profits are estimated by
comparing the profitability of State-owned enterprises/State-controlled
enterprises to profitability of all corporates in each sector (as listed in
Table 3.2.2). In sectors where State-owned enterprises/State-controlled
enterprises are dominant and their position is based on natural monopolies),
comparing profitability to national peers is not relevant and hence the sector
has been excluded from the estimate (e.g. public utilities). Forgone profits in
the energy sector are based on comparison with regional State-owned
enterprises/State-controlled enterprises peers, using data from Orbis database.
Forgone profits are calculated by measuring the difference between return on
equity of State-owned enterprises/state-controlled enterprises and return on
equity of the all companies in each sector and multiplying this difference with
the equity of State-owned enterprises/State-controlled enterprises in each of
the years. The same approach is applied to net margins and sales of State-owned
enterprises/State-controlled enterprises and finally the average based on
return on equity and net margin differences is taken as the cost of forgone
profits.
([40]) Soft budget constraints (a concept
formulated by Kornai, 1979) arise wherever a funding source – e.g. a
state-owned bank – finds it impossible to keep an enterprise to a fixed budget,
i.e. whenever the enterprise can extract ex post a bigger subsidy or loan than
would  have been considered efficient ex ante. 
([41]) Please note that these numbers also
include intra-company loans. 
([42]) Law: Zakon o Slovenskem državnem
holding-1 ("ZSDH-1"), published on 11 April 2014 in the Official
Gazette of the Republic of Slovenia (No. 25/2014).
([43]) According to the law on SSH, this
policy establishes the principles (transparency, traceability and
accountability), criteria and procedures applicable to Slovenian Sovereign
Holding when discharging its duties. Amongst others, it governs the procedures
on the acquisition or disposal of assets; it establishes detailed rules on the
candidacy procedures for the members of supervisory boards of State-owned
Enterprises State-owned enterprises', and sets up a number of safeguards for
the objectivity of the procedure (e.g. by imposing, on a contractual basis,
duties of independence on the members of the personnel committee). Other
measures include the conclusion in December 2014 of a management contract by Slovenian
Sovereign Holding and the Republic of Slovenia, determining the payment of
management fees to the first, and the appointment in January 2015 of a
compliance officer by Slovenian Sovereign Holding. The criteria for measuring
the performance of State-owned enterprises, shall be adopted within 1 month
approximately after the endorsement of the strategy. 
([44]) In July 2014, Slovenian Sovereign
Holding acquired 13.7% of the shares in the fund Posebna družba za podjetniško
svetovanje, d d. ("PDP") from the consultancy & management firm
Družba za svetovanje in upravljanje d.o.o. ("DSU"). In October 2014, Slovenian
Sovereign Holding acquired all the assets (including shares in different
companies) owned by DSU. In January 2015, SSH became the sole owner of PDP
after it acquired a 66.04% stake in the company from KAD for 5.7 m Euro. SSH is
now expected to merge with PDP by absorbing it within the next months.
([45]) The decision was taken by the
Parliament on 21 June 2013 following a proposal made by the Government on 15
May 2013 (Sklep o soglasju k odtujitvi naložb Republike Slovenije, Kapitalske
družbe pokojninskega in invalidskega zavarovanja, d. d., Slovenske odškodninske
družbe, d. d., Modre zavarovalnice, d. d., D.S.U, družbe za svetovanje in
upravljanje, d. o. o. in Posebne družbe za podjetniško svetovanje, d. d.,
published in the Official Gazette of the Republic of Slovenia, no. 52/2013)
([46]) Quarterly
report on the EA - Volume 13 (2014) Issue 2 - A
competitiveness measure based on sector unit labour costs. 
([47]) Matija Lozej,
Bank of Slovenia: Ravnotezni kazalnik konkurencnosti za Sloveijo (only in Slovenian)
([48]) The proportion of employees being paid
less than 105% of the minimum wage was 19.2% in Slovenia, highest among Member
States that have a minimum wage.
([49]) Labour costs at the level of the
minimum wage that include employer social security contributions are an
important determinant of labour demand and are among the highest in the EU.
([50]) The peak was to some extent inflated by
the planned end of investment of the highway company DARS. This is a public
company but its investment is treated as private in ESA95/2010. DARS'
investment accounted for about 1½ % of GDP in 2008 and much lower
thereafter.
([51]) Quarterly Report on the Euro Area, volume
12 (2013), issue 2. Assessing
the impact of uncertainty on consumption and investment.
([52]) Tangible investment in an area where no
prior physical facilities exit.
([53]) Unctadstat uses a different methodology
than the BoS (Graph 3.3.19) and
evaluates Slovenia's stocks of FDI at 32.5% of GDP in 2013.
([54]) http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states/index_en.htm
([55]) http://ec.europa.eu/priorities/jobs-growth-investment/plan/index_en.htm.
Slovenia submitted 22 projects (mainly in
infrastructure) under the new EU Investment Plan.
([56]) The Ministry of Economy targets an
increase in the FDI stock to the EU average by 2017.
([57]) Slovenia's
tax-to-GDP rate is the second highest of the new member states after Hungary.
([58]) The real estate
introduced in 2014 was repealed by the Slovenian Constitutional Court who
indicated that the law did not specify the methods of real estate evaluation.
([59]) http://www.pwc.com/gx/en/paying-taxes/download.jhtml 
([60]) Based on Commission Winter 2014 forecast,
EPC agreed long-run convergence assumptions of underlying macroeconomic variables
(real interest rate, real GDP growth, inflation) and the assumption of constant
fiscal policy beyond the forecast horizon.
([61]) The historical structural primary balance scenario assumes  gradual convergence to the historical average for the structural primary balance beyond the
forecast, all other macroeconomic assumptions as in the baseline 
([62]) The combined historical scenario
assumes gradual convergence to historical averages beyond the forecasts for all main
macroeconomic variables - structural primary balance, implicit interest rate and real GDP growth.
([63]) The structural primary balance is assumed
to remain constant at end-of programme value; all other macroeconomic variables
- interest rate, inflation, growth – over the programme horizon are also taken
from the SCPs
([64]) Peer Review in Slovenia, November 2014:
Long-term care – the problem of sustainable financing – Host Country Paper.
([65]) The EU Ageing report 2015 for Slovenia
([66]) Ministry of Labour, Family, Social
Affairs and Equal Opportunities: Monitoring of the Pension Reform,
Spring 2014.
([67]) Pension and Disability Insurance
Institute: pension-to-wage ratio 56.6% for the average pension and 61.7% for
the average old-age pension, both -0.3pp compared to 2012.
([68]) 25.5% compared to 15.6% for EU 28 peers
and 14.5% SI population average EU-SILC 2013.
([69]) Based on Eurostat COFOG data.
([70]) In November 2014 additional five therapeutic
groups were introduced, estimated annual savings of EUR
24.6 million. 
([71]) Progress on policy measures relevant for the correction of
macroeconomic imbalances - Slovenia, October 2014
http://ec.europa.eu/economy_finance/economic_governance/documents/20141224_si_imbalances_epc_report_en.pdf
  
([72]) Public
expenditure on long-term care is projected increase from 1.35% of GDP in 2012
to 3.0% of GDP in 2060. 
([73]) Such reform will need to take in to
account Member States' obligations under Directive 2011/24/EU
([74]) IMAD, Economic mirror, November 2014,
pages 32-33.
([75]) In 2014, only 12% of active labour
market policy resources were used for education and training measures while 40%
was earmarked for public works, 22% for self-employment and 16% for subsidised
employment.
([76]) The Act on Occasional Student work was
incorporated into the Public Finance Balance Act in December 2014.
([77]) http://www.oecd.org/pisa/

([78]) Eurydice (2014) Modernisation of Higher
Education in Europe: Access, Retention and Employability.
([79])  A fully
operational one stop shop (e-VEM) to start up a company is in place and has
been very efficient: time required to start up a company is below the EU
average at no cost (World Bank Doing Business report 2015).
([80]) During the period January 1991 -
January 2015, the number of bylaws increased from 1 006 to 18 332 and the
number of laws from 356 to 799.
http://www.tax-fin- lex.si/VeljavnaZakonodajaRS.aspx 

([81]) The World Bank Doing Business 2015
estimates that 212.5 days are needed in Slovenia in order to deal with
construction permits – 63 days more than the OECD average. There has not been
any improvement relative to the previous year.
([82]) Flash Eurobarometer 396, “Retailers’
attitudes towards cross-border trade and consumer protection”, 2014 and  Flash
Eurobarometer 397, “Consumer attitudes towards cross-border trade and consumer
protection”, 2014.
([83]) 256 measures are listed in the
document, 64 have been implemented (25%), 104 are being implemented (41%) and
86 are pending for implementation (34%). http://www.stopbirokraciji.si/en/smart-regulation/concrete-realised-measures/
([84]) The share of value added in the
business services sector that is generated by enterprises coming from another
EU Member State.
([85]) Indicators of Product Market Regulation,
OECD http://www.oecd.org/economy/growth/indicatorsofproductmarketregulationhomepage.htm 

([86]) The rate of total early-stage
entrepreneurial activity (TEAindex) grew robustly for the second year running
in 2013 and achieved the pre-crisis (2008) peak of 6.5%, an increase of 1.1
percentage points over the year before. Source Global Enterpreneurship
Monitor.
([87]) Start up Manifesto, June 2014; Some
insights into entrepreneurship and start-ups in Slovenia, Austria and Italy,
and Prof. Prof. dr. Miroslav Rebernik Mag. Matej Rus, Dec 2014.
([88]) For investments into R&D the
government offers a 100% reduction rate, depreciation allowance, reduced
taxable base for royalties. They also offer a 40% tax relief for investment in
tangible assets. See the study on R&D Tax incentives: Final Report", written
by CPB in consortium with: CAPP, CASE, CEPII, ETLA, IFO, IFS, HIS, Taxation
paper No 52, 2014.
([89]) Slovenia has 3.1 PTC patents per
billion GDP compare to the 3.9 at EU level (2010) and 6.9 % of high cited
scientific publications compare to the 11% at EU level (2009). It also ranks
below the EU average on the Innovation Output indicator (Slovenia ranks 14th
showing a medium level performance) and just below the EU average on the
Innovation Union Scoreboard (ranked 12th).
([90]) Natura 2000 Barometer, The Natura 2000 Newsletter, July 2014.
([91]) As regards the five main drivers of the
digital economy, Slovenia ranks 24th out of 28 Member States on
connectivity, 14th on human capital, 16th as regards the
use of internet services, 20th in integration of digital
technologies by business, and 22th in digital public services.
([92]) Czernich, N., O. Falck, T. Kretschmer,
L. Woesmann (2011) Broadband Infrastructure and economic growth, The Economic
Journal, 121 (552), pp. 505 532
([93]) Slovenia has 0.84% share of
e-procurement (in total procurement), compared to 13% reached at the EU level. 
([94]) The EU Public administration scoreboard
2013, based on WB Worldwide Governance Indicators 2009-2013 
([95]) OECD Public Governance Review –
Slovenia 2012
([96]) The forthcoming 2015 EU Justice
Scoreboard (March 2015)
([97]) Flash Eurobarometer 397, “Consumer
attitudes towards cross-border trade and consumer protection”, 2014.
([98]) The following categories are used to
assess progress in implementing the 2014 CSRs of the Council Recommendation: No
progress: The Member State has neither announced nor adopted any measures
to address the CSR. This category also applies if a Member State has
commissioned a study group to evaluate possible measures. Limited progress:
The Member State has announced some measures to address the CSR, but these
measures appear insufficient and/or their adoption/implementation is at risk. Some
progress: The Member State has announced or adopted measures to address the
CSR. These measures are promising, but not all of them have been implemented
yet and implementation is not certain in all cases. Substantial progress:
The Member State has adopted measures, most of which have been implemented.
These measures go a long way in addressing the CSR. Fully addressed: The
Member State has adopted and implemented measures that address the CSR
appropriately.